You’ve narrowed down your health insurance plan options, and now it’s time to choose. Your instincts may tell you to go with the lowest premium (your monthly payment) – but is that really a good idea?
When it comes to health coverage, picking a plan with a high deductible may be more expensive in the end. Your premium and your deductible (what you pay before your plan pays) are more connected than you may expect – the pricing of one impacts that of the other. Once you know the differences between them and how they work together, it’s easier to choose the plan that’s best for you – and your wallet!
Looking for more information? Brush up on common health insurance terms so you can have a better understanding of both your needs and your plan.
What is a deductible in health insurance?
A deductible is the amount of money you need to pay, each year, before your health insurance plan will pay for most types of care. For example, if your deductible is $2,000 a year, your plan won’t pay for any of your care until you’ve paid $2,000 out of your own pocket for things like doctor visits, testing, prescriptions, X-rays and other services. After that, your plan will pay the majority of the cost for covered care and you’ll only pay for coinsurances or copays until you meet your out-of-pocket maximum.
You’ll still find value in your health plan while you’re paying your deductible. One of the most important benefits of having health insurance is the discounted rates with doctors and clinics that are negotiated by health insurance companies to help you save money. Think of it this way, when you buy things in bulk, like paper towels, the cost per roll is less expensive than when you buy them individually. The same idea applies for health care. Most health plans also cover certain types of care, like preventive services, at 100% even before you pay your deductible. And most plans cover medications before you hit your deductible as well.
Deductible vs. out-of-pocket maximum
What’s the difference between your deductible and your out-of-pocket maximum? A deductible is what you pay before your plan pays, while your out-of-pocket maximum is the most you’ll pay for care in a year.
Once you’ve paid enough to hit your plan’s out-of-pocket maximum, your plan will pay 100% of any other covered care you have for the rest of the year. Meaning you won’t pay a penny if you’ve already hit this ceiling unless the care you receive is out of network or not covered by the plan.
What is a premium in health insurance?
A premium is the amount you pay for your health plan each month, whether you use any care or not.
Does your premium go towards your deductible?
No, your premium does not go towards your deductible, and it doesn’t count for your out-of-pocket maximum (the most you’ll pay for care each year). But deductibles and premiums flow into one another. They have an inverse relationship. When one is more affordable, the other tends to be more expensive.
Why does having a higher deductible lower your insurance premiums?
A high-deductible health plan (HDHP) is an insurance plan with a low premium and a high deductible. But why would one affect the other? Think of it in terms of balance. A plan with both a high deductible and high premium would be too expensive for an individual or employer. A plan with a low deductible and low premium would be too expensive for an insurance company. Making them opposites helps balance costs for both the member or employer and health plan.
The benefits of a high-deductible versus a low-deductible medical plan
In 2023, health insurance plans with deductibles over $1,500 for an individual and $3,000 for a family are considered high-deductible plans. But why would a plan with a high deductible be a good choice?
If you’re enrolled in a plan with a higher deductible, preventive care services (like annual checkups and screenings) are typically covered without you having to pay the deductible first. And a higher deductible also means you pay lower monthly premiums. If you’re not receiving medical care often, that could save you a lot of money. Plus, some employer-sponsored health plans pair high-deductible plans with a health savings account (HSA) that your employer may contribute to, and the funds in this account can be used toward your deductible.
On the flip side, many consider a low-deductible plan to be a good peace-of-mind option. While monthly payments may be more expensive, your deductible is lower, which means you’ll pay less money before your plan starts paying. This can make your yearly costs more manageable if something unexpected happens or if you have frequent care needs.
Is it better to pay higher premiums or a higher deductible?
The truth is that there’s no one-size-fits-all answer to this question. Choosing the right plan depends on both your health needs and your financial situation. Let’s look at some key factors that may help you select the plan that will work best for you.
Choosing a higher insurance premium, lower deductible plan
A lower deductible plan is a great choice if you have unique medical concerns or chronic conditions that need frequent treatment. While this plan has a higher monthly premium, if you go to the doctor often or you’re at risk of a possible medical emergency, you have a more affordable deductible. This plan also works well for those who need regular prescription medications or who have family members in need of frequent care.
Choosing a lower premium, higher deductible health plan
If you are generally healthy and don’t have pre-existing conditions, a plan with a higher deductible might be a better choice for you. Your monthly premium is lower since you’re only visiting the doctor for annual checkups, and you’re not in need of frequent health care services. If you choose this type of plan, make sure your budget can cover your plan’s deductible in case of an unexpected illness or emergency.
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