Premium Vs. Deductible: The Differences That Affect Your Insurance Costs

Understanding the difference between premiums and deductibles is a key part of choosing the right health insurance plan. Premiums are the amount you pay each month for coverage, while deductibles are the amount of money you'll have to pay out-of-pocket before your insurance company begins paying. Depending on your individual needs, it may be worth considering plans with higher premiums and lower deductibles or lower premiums and higher deductibles. Coverage Guru can help compare health insurance quotes so that you make an informed choice without sacrificing quality or value.
Premium Vs. Deductible: The Differences That Affect Your Insurance Costs

Most people are familiar with the basics of insurance, but understanding the differences between premiums and deductibles can make a big impact on your insurance costs. Knowing when a policy builds on premium payments and when you're likely to pay out-of-pocket is key to creating an effective healthcare protection plan.

Premiums and deductibles are closely intertwined when it comes to insurance. Both are important parts of a policy that you must pay, but they are also somewhat different in the way they work. A premium is a fixed payment that you make regularly – usually monthly or yearly – toward your insurance policy. A deductible is an amount of money that you must pay out-of-pocket when a medical service is received before your insurance will cover any costs. Although similar in many ways, premiums and deductibles have quite different roles in your overall healthcare budget.

Brush up on popular health insurance terms here. Learn more about the differences between premiums and deductibles in this article so you can get the most bang for your buck when shopping for health insurance.

What Is A Deductible?

A deductible is an amount of money that you must pay out-of-pocket when a medical service is received before your insurance will cover any costs. This amount can vary by insurance plan and the type of services being provided. Higher deductibles can mean lower premiums, so it's important to weigh the cost implications when shopping for health insurance plans. A deductible must be met before a policyholder receives any benefits from the insurer, and in some cases, there may be coinsurance payments or additional copayments after the deductible has been met.

What Is An Insurance Premium?

An insurance premium is a fixed payment you make regularly toward your insurance policy. The premiums may be paid monthly, quarterly, or yearly depending on the type of coverage and the insurer. Premiums are designed to help cover the cost of providing insurance to the policyholder. The amount of the premium is determined by the insurer based on several factors such as lifestyle and medical history, age, gender, and location.

The Correlation Between Premium and Deductible

When evaluating an insurance plan, it is important to consider both the premium and the deductible. A higher deductible typically means lower premiums, however, there may be fewer services covered or a greater coinsurance cost after the deductible has been met. Having a high deductible can help keep premiums low but it's important to understand how much out-of-pocket costs might increase should you need any medical services.

Having a higher deductible typically results in lower premiums because the insurance company is taking on less risk. When a policyholder agrees to pay more out-of-pocket should they require medical services, the insurance company is not required to pay as much upfront and therefore can reduce their premium charges. Therefore, if you are someone who rarely visits the doctor and wants to keep your monthly premiums down, selecting a higher deductible could be a good option for you.

It's also essential to ensure that your out-of-pocket costs still remain within your budget while making sure that your insurance adequately meets your needs.

The Key Differences Between Premium and Deductible

Understanding the difference between premium and deductible for health insurance can be an essential first step in finding the right plan for you. The chart above highlights the key differences between these two terms, giving a valuable insight into what to expect from your policy. On one hand, premiums are a fixed cost regardless of use – but on the other hand, deductibles are variable depending on the usage of healthcare services during the policy period. Knowing these distinctions is important when researching different plans and determining which one provides you with the level of coverage that best meets your needs.

Premium Deductible UnitedHealthcare
The amount you pay each month for your insurance coverage. The amount you have to pay out-of-pocket before your insurance begins to cover associated costs with medical services. Lower than HSA
Does not typically change during the policy period. Can change with the policy period, depending on the plan and insurer. No
Is always due regardless of whether or not healthcare services are used. Is only required if healthcare services are used during the policy term. Money is immediately available to pay for qualified medical expenses.

Does your premium go towards your deductible?

Premiums do not directly go toward your deductible. The premium is the amount that you pay for your insurance coverage each month, while the deductible is the out-of-pocket expense you are required to spend before your insurance begins to cover associated costs with any medical services. Your premiums help offset administrative costs, such as customer service, benefits processing, and claims investigations, but it does not count directly toward paying down your deductible.

Is it better to pay higher premiums or a higher deductible?

The answer to this question depends on several factors, including the cost of services, how often you will need to use them, and your overall financial situation. Generally speaking, those who use healthcare services infrequently may benefit from higher premiums because they will collect more benefits over time.

On the other hand, those who expect to require frequent medical attention may find it better to pay a higher deductible since it can lead to a lower premium cost in the long run. Ultimately, it's important to do your research and compare plan options before making a decision.

High Premium and Low Deductible Plans

A high premium and low deductible plan is a type of health insurance plan that typically has a higher monthly cost but covers more of the bills related to medical care. With these plans, you will have lower out-of-pocket costs and more comprehensive coverage in case of an emergency.

The pros of this type of plan are that it provides more financial security, helps with budgeting as costs are predictable, and you can get the care you need without worrying about large out-of-pocket expenses. The cons include having to pay a higher monthly premium, not having full control over your treatment decisions, and not being able to take advantage of certain tax deductions or credits that lower cost plans might be eligible for.

Low Premium and High Deductible Plans

Low premium and high deductible plans are health insurance plans that cost less each month, but require you to pay a large amount before coverage kicks in.

The pros of this type of plan are that you can save money on your monthly premiums, potentially qualify for certain tax deductions or credits, and have more control over your treatment decisions. The cons of this type of plan include having to pay a large out-of-pocket cost if an emergency arises, potentially sacrificing quality care (for example due to low provider networks), and having to budget for unexpected expenses as the total costs per year may be unpredictable.

Are Premiums and Deductibles The Main Insurance Costs?

Premiums and deductibles are two of the most important costs associated with health insurance, but they are not the only costs to consider. Other costs associated with health insurance include copayments, coinsurance, out-of-pocket maximums, any additional services or benefits offered by the plan such as vision or dental plans, and prescription drugs. It is important to evaluate all of these costs when choosing a health insurance policy.

Here are the definitions of the other insurance costs:

  • Copayment: A fixed-dollar amount you owe each time you receive certain services, like a doctor's visit.
  • Coinsurance: A cost sharing arrangement in which the insurance company and the insured share the cost of covered healthcare services according to an agreed upon percentage.
  • Out-of-pocket maximum: The maximum amount of money that you must pay out of your own pocket for healthcare services during a policy period before your health insurance plan covers 100 percent of your costs.
  • Vision or dental plans: Additional plans offered by health insurers to provide coverage for vision care and/or dental care.
  • Prescription drugs: Coverage for prescription medication provided by health insurers.

Key Takeaways

When choosing a health insurance plan, you'll need to consider both premiums and deductibles. The premium is the amount of money you pay every month for your health insurance coverage. Generally speaking, plans with lower premiums have higher deductibles and vice versa. A higher deductible means that you will have to pay more out-of-pocket for medical expenses before the insurance company begins paying. Depending on your individual needs, it may be worth considering higher premiums with lower deductibles or vice versa.

Through Coverage Guru, you will be able to compare and contrast health plans from different insurers so that you can make the most informed decision possible.