Money and You: Course Notes

If your insurance policy has a deducible, it means that the insurance provider will only pay for a bad event after you’ve paid a certain amount. For example, suppose you have a medical policy in which there is a $1,000 deductible applied each year. This means that before the medical insurance will pay for any of your medical expenses, you’ll need to pay $1,000 of your own money first. For example, suppose your medical insurance has a $1,000 deductible. Suppose that you get sick and need to visit your doctor, who charges $300 per visit. You would pay that $300. Now suppose that sometime later you fall and break your leg. The process of getting x-rays and a cast cost $4,000. You would pay the first $700 since that is the remaining balance on your deductible. insurance would cover the rest. All other expenses will be covered by insurance.

Keep in mind that in the above scenario, you wouldn’t like need to pay that first $300. Due to the Affordable Care Act, things like visits to a doctor can be held liable to deductibles. However, the idea outlined above is how deductibles work mathematically.

So, why do deductibles exist? The benefit to you are lower monthly premiums. Deductibles mean less risk for the insurance company, which means they’ll require less in premiums each month to take on the risks. It also has to do with the cost to process claims. Suppose you notice that your car has a really feint surface scratch on it that you could easily buff out for about $10. If you had an insurance policy for your car with no deductible, you could choose to take your car to an autobody shop to have the scratch repaired and have insurance pay for it. Not only would they need to pay the autobody shop (likely around $200), they also need to pay the employees who actually handle claims like this. It’s expensive. So, such an insurance policy would require much higher premiums compared to one with a deductible.

Deductibles aren’t mandatory. Many insurance companies have policies with no deductibles. You might be shocked at how much more expensive no-deductible policies are.

Co-pays are similar to deductibles. They are most commonly found in medical-related insurances. When you visit a medical office, you may have to pay a co-pay. This is a relatively-small amount that you pay for a medical visit, and your insurance would pay for the rest. For example, if your doctor charges $300 per visit and you have a $20 co-pay, when you visit your doctor, you would need to pay $20 to them directly, and your insurance would pay the remaining $280.

Co-pays are often the most common expenses people pay for medical care in the US. So, they are often viewed negatively. Much like deductibles, the purpose of co-pays is to reduce the monthly premiums people pay. Essentially, co-pays deter people from visiting a doctor for non-emergency situations. For example, if someone were to wake up with a minor sore throat, they may be inclined to visit the doctor to determine if it is strep throat or some other unlikely illness. However, a copay may make that person reconsider going until they have more pronounced symptoms. The benefit of this determent is that medical costs as a whole are much lower and alleviates the strain of having too few doctors. The potential issue with co-pays is that some people may not seek medical care when it is actually necessary.

Some insurance policies have a maximum amount they will pay for a loss, injury, etc. This is called a policy limit. Policy limits are very common in car insurance and property insurance. Limits are not necessary, and the limit amount direct affects your monthly premium. The lower your policy limit, the lower your monthly premium. Suppose you insure your car that is worth $30,000 with a policy limit of $20,000. If your car is completely destroyed, your insurance would cover only $20,000. You’d pay the remaining $10,000.