Deductible vs. Out-of-Pocket Maximum: What’s the Difference?
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Summary:
A deductible is the amount of money you’ll pay before your insurance coverage kicks in. Until you reach your out-of-pocket maximum, you will still be responsible for other out-of-pocket payments like co-payments and coinsurance. Choosing a low deductible and out-of-pocket limit usually means paying a higher monthly premium. However, it’s up to you to balance your personal risks and potential costs when selecting an insurance plan.
Insurance jargon is hurled at you faster than you can say “out-of-pocket maximum.” You smile and nod, but you still have so many questions. Whether it’s health insurance, car insurance, or rental insurance, it doesn’t have to be confusing. We at SuperMoney are here to simplify what seems complicated so that you can make truly informed decisions about your finances. Keep reading to learn the differences between a deductible and an out-of-pocket maximum — and why you should care.
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What’s the difference between a deductible and an out-of-pocket maximum?
Look at it this way: Insurance is how you spread out unexpected large costs before and after they happen. It’s not free money; every insurance plan comes with slightly different payment structures. Deductibles and out-of-pocket maximums are two ways you’ll pay for your insurance coverage after an event, such as a medical exam or a car accident. Let’s learn what these two terms mean and how they differ.
What is a deductible?
Your deductible is the amount you must pay out-of-pocket before your insurance company starts paying instead. The average health insurance deductible in the United States is around $1,500 for individuals and $3,000 for families. For example, if your deductible is $2,000 and your child breaks an arm, you must pay $2,000 in medical expenses. After that, your health insurance plan contributes to the cost of care.
Insurance doesn’t always cover 100% of costs after you meet your deductible, although some plans do. On the other hand, when you meet your out-of-pocket maximum, you are most likely to receive full coverage.
What is an out-of-pocket maximum?
Deductibles aren’t the only insurance-related expense you’ll find yourself paying with out-of-pocket cash. Other health care costs like co-pays and coinsurance require you to contribute personal funds. An out-of-pocket maximum is the most money you will have to pay, for all these expenses combined, before your insurance covers all costs.
As with most aspects of insurance, there are caveats. Namely, out-of-pocket maximums are typically only valid for in-network providers and services. Additionally, they reset each year.
The average out-of-pocket maximum in the United States is around $5,000 for an individual and $8,000 for families. Keep in mind that this varies depending on your type of insurance.
Does your deductible go toward your out-of-pocket maximum?
It’s an important question. Yes, your deductible contributes to your out-of-pocket maximum! For example, let’s say your deductible is $2,000, your out-of-pocket maximum is $4,000, and you meet your deductible. That means you’re halfway to meeting your out-of-pocket maximum.
Similarities and differences between deductibles and out-of-pocket maximums
Knowing the difference between a deductible and an out-of-pocket maximum will help you understand your insurance plan better and choose the best one for your life when the time comes. Use the following table and diagram to clear things up.
| Deductible | Both | Out-of-pocket maximum |
|---|---|---|
| Average: $1,500–$3,000 | Dependent on the insurance network | Average: $4,000–$8,000 |
| Post-deductible coverage is not always 100% | Money comes out of your pocket before insurance pays | 100% insurance coverage after met |
| Co-pays do not usually count toward the deductible | Your insurance premium does not count toward your deductible or out-of-pocket maximum. | Co-pays, deductibles, and coinsurance count toward the out-of-pocket maximum. |
| More common to meet yearly deductible | You may still be responsible for out-of-network costs | Less likely to meet yearly out-of-pocket maximum |
Trade-offs for low deductibles and low out-of-pocket maximums
Having a low deductible and low out-of-pocket maximum sounds desirable, right? On the surface, you’ll pay less out of your pocket before insurance kicks in. However, there can be disadvantages to this. We talked to insurance experts about some of the trade-offs of having low out-of-pocket limits. Here’s what they had to say.
Higher premiums
John McCormick, editorial director at Insure.com, points out that your monthly insurance payments, otherwise known as premiums, will be higher to achieve a lower deductible. You’re paying more on your monthly bills versus paying more in the event of an accident.
He says,
“The trade-off for low deductibles is higher premiums – the amount you pay for health insurance each month. Many people, however, opt for high-deductible health plans, or HDHPs, which offer lower premiums with the understanding that they'll pay more out-of-pocket for care until they reach their plan's deductible.”Click to Tweet
Responsibility for the cost of claims
Adjusting out-of-pocket costs is another way to increase or decrease your responsibility to pay for insurance claims. Keep this in mind when selecting your deductible on your insurance policy. Angel Conlin, Chief Insurance Officer at Kin Insurance, puts it this way:
“The larger your deductible, the lower your premiums tend to be. That's because you take on greater responsibility for the cost of a claim – and your settlement payout will be less, too. Though taking on the largest deductible available to lower your premium payments might be tempting, it's important to choose one you can comfortably afford at the time of a claim. Also, most insurers offer specific amounts to choose from and often require a minimum deductible.”Click to Tweet
Pro tip: paying a higher premium for a lower deductible sometimes makes sense
Andrew Jernigan, CEO of Insured Nomads, suggests,
“If someone does not have the reserve funds available to tap into in the case of policy utilization or is keenly aware that they will use the plan or high probability of filing claims, then it makes sense to carry a low deductible and thereby pay a higher premium.”Click to Tweet
In other words, if you don’t often have extra cash on hand for an emergency, or you have a high probability of using your insurance for whatever reason, paying higher premiums may be worth it.
How to choose the best insurance policy
Every person and family is different when it comes to insurance policies. This means the plan providing the greatest benefit will be one uniquely suited to the applicant’s financial and health circumstances.
Decide whether you want a low premium or low deductible
Now you understand that lower deductibles are associated with higher monthly premiums, and higher deductibles are associated with lower monthly premiums. Both have their advantages.
For example, let’s say you have a large family, have an employer-sponsored plan, and expect to face a few health insurance claims this year. Taking more out of your paycheck each month might be worthwhile rather than facing high deductibles on inevitable health care costs.
On the other hand, let’s say you’re single, healthy, and saving up for a house. Putting more monthly cash toward your house fund might be more worthwhile and risk a higher deductible if unexpected insurance claims come up.
There are countless scenarios for which either a low deductible or a low premium is favorable. Start to get familiar with what it looks like to assess your own situation. Think about your income, goals, risk tolerance, and actual risk. These factors will help you decide which route to take.
Compare potential insurance providers and plans
John McCormick of Insure.com urges those looking for health insurance to “consider how financially strong the health insurance company is, how many complaints the company has against it, and how well it services its customers.”
Research, contact, and compare insurers in your state or through your employer. Ask for information about their plans and weigh your options. Use one of SuperMoney’s insurance comparison tools for the most up-to-date and thorough comparisons.
FAQ
Which is more important, deductible or out-of-pocket?
Both deductibles and out-of-pocket limits are important. Of the two, it’s more common to meet your deductible. It’s what you pay before your insurance policy kicks in. Out-of-pocket costs encompass all expenses you pay, including and beyond the deductible.
Does the deductible count as out-of-pocket?
Yes, your deductible counts as out-of-pocket and contributes to your out-of-pocket maximum.
What happens when I reach my deductible?
Your insurance company will pay for some or all of your covered expenses when you reach your deductible.
What is out-of-pocket vs. deductible vs. co-pay?
Out-of-pocket includes deductible, co-pay, and other payments toward medical expenses. A deductible is a limit on how much you’ll pay out-of-pocket before insurance starts covering costs. A co-pay is a fixed amount you pay for each service.
Is it better to have a deductible or not?
Almost every healthcare plan comes with some deductible. The amount you choose for your deductible depends on your healthcare needs and financial situation. A higher deductible will mean lower premiums but higher costs should you file a claim. A lower deductible could mean higher premiums but lower upfront expenses.
What happens if I don’t meet my deductible?
Your insurance plan will not contribute to your costs if you don’t meet your deductible.
Key takeaways
- A deductible is the money you must pay before insurance coverage kicks in. Once you meet your deductible, your insurance company will cover part or all of the remaining costs.
- An out-of-pocket maximum is the limit of all payments, including your deductible, co-pay, and coinsurance, after which insurance pays all the remaining covered expenses.
- Low deductibles and out-of-pocket maximums may cost you a little bit more in the present but save you in the future. The best plan for you depends on your needs, risk tolerance, and financial situation.
Further reading: To simplify the discussion, and because we get asked about this type of insurance a lot, this article has often talked specifically about health insurance. Premiums and deductibles are an insurance universal, however, relevant to everything from renters insurance to car insurance. Interested readers may find some useful additional readings in the article sources below or through SuperMoney’s insurance topic portal.
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