What you need to know about deductibles to avoid a 'huge, unexpected expense'


It's open enrollment season, which means it's time to check in with and possibly make changes to your health-care plan. But having to wade through the jargon and unfamiliar terminology associated with many health-care plans can confuse a lot of people and cause them to rush through the process.

Deductibles, for instance, are one of the most misunderstood elements of health insurance plans. And experts say what you don't know can cost you.

"Something as simple as not understanding how deductibles work could immediately result in a huge unexpected expense," Jina Etienne, a certified public accountant and a member of the AICPA's national financial literacy commission, recently told Grow.

What a deductible is and why it matters

In the simplest terms, a deductible is the amount of money each year "you have to pay before your insurance company pays anything," says Carolyn McClanahan, a physician and certified financial planner at Life Planning Partners in Jacksonville, Florida. That's in addition to your monthly premium and whatever co-insurance you may have to pay as well.

Let's say you get sick, and after you go to the doctor your bill is $5,000. If your insurance plan has a $1,000 deductible, you'd pay $1,000 to meet your deductible and then your insurance company would pay the remaining $4,000.

Something as simple as not understanding how deductibles work could immediately result in a huge unexpected expense.
Jina Etienne
certified public accountant

Generally, McClanahan says, there is an inverse relationship between your deductible and your health-care premium, or the monthly payment you make to your insurance company every month: "The higher your deductible, the lower your premium."

Deductibles have been on the rise for years. Most Americans get their insurance through work, and the average deductible for an employer-sponsored plan has risen from $826 to $1,655 over the past decade, according to the Kaiser Family Foundation's annual employer benefits survey. Employers are embracing high-deductible plans as part of an effort to contain ever-increasing health-care costs.

These days, it's not uncommon for annual deductibles to range anywhere from $3,000 to $10,000.

'The higher your deductible, the lower your premiums'

Striking a balance between deductibles and premiums is what most consumers struggle with when trying to decide on a health-care plan. McClanahan says that the best plan for you depends on how healthy you are and your individual situation: How much money you make, whether you have kids, and so on. Here are her general recommendations.

If you don't make a lot of money: If you're strapped, McClanahan recommends you shop for insurance through your state exchange, or through the federal exchange, HealthCare.gov. Depending on how much you make, you may qualify for assistance that can drastically reduce how much you pay for coverage.

If you're young and healthy: If you are in good health and less likely to use health-care services, you'll likely save money by opting for a high-deductible, low-premium plan. There's always the risk that you'll need to go to the hospital and have to pay the high deductible, though, so consider putting some pretax money in an HSA or making sure your emergency fund could cover the cost.

Everyone else: McClanahan recommends that you shop around for plans to find one that you're comfortable with — one that features a reasonable balance of affordable premium and reasonable deductible. There's never going to be a perfect plan, but if you make too much money to qualify for subsidies and aren't in perfect health, your best bet is to visit the exchanges and see what's available.

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