Premium Vs. Deductible - The Differences and Correlation

Understanding your health insurance policy can get hard at times, but knowing what you’ll end up paying is important. Two of the most important expenses are your premiums and deductibles, so here’s what you need to know.
Premium Vs. Deductible - The Differences and Correlation

Understanding the differences between premiums and deductibles is an important part of understanding health care costs. A premium is a fixed monthly cost that you must pay to maintain coverage while a deductible is a fixed amount that you must pay before your insurance plan begins covering any costs. When selecting an insurance plan, it’s important to consider both the premium and deductible, as this can have an impact on how much you ultimately end up paying for medical services. Knowing these differences can help save you money in the long run by allowing you to select the best plan for your individual needs.

Premium Vs. Deductible - What’s The Difference?

Premiums and deductibles are two important components of healthcare costs that should be considered when selecting a health insurance plan. A premium is a fixed monthly cost that must be paid to maintain coverage, while a deductible is the amount of money you will need to pay before your insurance kicks in. Knowing the differences between these two components can help you make an informed decision about which plan best suits your individual needs and save you money in the long run.

What Is An Insurance Premium?

An insurance premium is a fixed amount that must be paid to maintain health insurance coverage. Premiums vary based on factors such as the type of health plan, the level of coverage, age, and location. For example, a person who is older or lives in an area with high healthcare costs may have higher premiums than someone younger or living in an area with lower costs. Higher levels of coverage may also mean higher premiums. In addition, some insurers offer discounts for preventive care services, which can help reduce premiums.

Your premium payments are typically due each month, and you will need to set up payment arrangements with your insurance provider. Most insurers offer several options for making payments, such as by mail, online, or direct debits from a bank account. You can also arrange to have your premium payments automatically deducted from your paycheck if your employer offers that option.

What Is A Deductible?

An insurance deductible is the amount of money you need to pay before your insurance kicks in. For example, if you have a $1,000 deductible and you get into a car accident that costs $2,000 to fix, you will need to pay the first $1,000 and your insurance will cover the remaining $1,000. Some plans have a deductible for each type of service, such as medical or dental, while others have one deductible for all services. The amount of the deductible may vary depending on the plan selected.

Deductibles can vary significantly among different plans. For example, some plans may have a $250 deductible for medical expenses and a $500 deductible for dental expenses, while other plans may have a single deductible of $1,000 for all expenses. The amount of the deductible may also vary depending on the type of coverage selected.

A fixed amount that must be paid to maintain coverage. Varies based on factors such as type of health plan, level of coverage, age, and location, and is paid monthly.

The amount of money you need to pay before your insurance kicks in, and varies depending on the plan selected and how much money will be spent out-of-pocket before your insurance covers the remaining costs. Only applies when services are rendered.

How The Two Are Related

As we alluded to above, while the two costs may seem completely independent from each other, they are more closely related than you might think. Health insurance companies are in the business of making money, so they want to get the most money out of you before starting to shell out money for your medical costs.

When it comes to premiums versus deductibles, the higher your monthly premium is, the lower your deductible will be. Now, that may not always be the case, but for the most part, it holds true. If you take a second to think about it, you’ll understand why the relationship between premiums and deductibles makes so much sense.

Essentially, you’re making a decision between paying more up front, or more down the line. With higher premiums, you’re choosing to put more money into the risk pool without knowing whether or not you’ll need to use all of your benefits. As a reward, health insurance companies lower your deductible. Vice versa, if you choose a plan that doesn’t require much money up front, insurers will penalize you with a higher deductible to offset the costs they may incur.

How It Works

Say for example you have two plans to choose from, one that has premiums of $55 a month and deductibles of $4,500, and the other that is $200 with a $3000 deductible. The more you pay for premiums, the less you pay for your deductibles. If you need insurance and cannot pay a lot of money for it on a monthly basis, then you may want to go with a plan that has higher deductibles and use the plan as you would a catastrophic or emergency insurance plan.

Does Your Premium Go Towards Your Deductible?

No, unfortunately your monthly premiums don’t count towards your annual deductible, which is both confusing and frustrating. Your premiums are spent as part of an agreement with your insurance provider.
As we touched on earlier, the money you pay up front is part of your contractual agreement with your insurer so that they cover some of your medical expenses, which is not considered an out-of-pocket expense.

In most cases, the premium is separate from the deductible. Your premium is the amount of money you pay for your plan each month, and will not be applied towards your deductible. However, if you have a Health Savings Account (HSA) or other account-based plans, then any funds contributed to those accounts may help reduce your deductible.

What Costs Do Count?

Money wallet and expenses

Your copays and coinsurance count towards the plan’s health and pharmacy deductibles. This is anything else that you pay, other than your monthly premiums. These are the costs related to prescriptions, lab work, doctors visits, physio, mental health treatment, substance abuse recovery, surgery and any other procedure or service covered by the plan that you had to pay out of pocket in order for the medical provider to render these services to you.

Why Does Having A Higher Deductible Lower Your Insurance Premiums?

Having a higher deductible can lower your insurance premiums because it reduces the risk for the insurer. When you have a higher deductible on your policy, you are responsible for a larger amount of expenses before your insurance coverage kicks in. This means that the insurer has to pay out less money in claims and therefore can offer you lower premiums in return.

High Deductible vs Low Deductible

Choosing between a high deductible and a low deductible health plan depends on your individual needs. A high deductible plan may offer lower premiums but carries a greater financial risk if you are faced with major medical expenses. Conversely, a low deductible plan provides more immediate coverage but often has higher monthly premiums. Your best choice may depend upon your current health situation, how much you can afford to pay out-of-pocket each month, and what type of coverage is most important to you.

If you are in good health and do not visit the doctor very often, a high-deductible plan might be the better choice. This type of plan generally has lower monthly premiums than plans with low deductibles and can save money over time if you don’t need to use the coverage. However, if you are facing unexpected major medical expenses, this type of plan may not provide as much coverage or protection as a low deductible plan.

High Premium vs Low Premium

High-premium plans typically provide more coverage and protection than low-premium plans. With a high premium plan, you pay a higher monthly rate to cover more potential medical expenses; however, with a low premium plan, you may be putting yourself at risk when it comes to covering major medical expenses. For example, if you are in good health and don’t anticipate needing much medical care, a low-premium plan might be the better choice for you since it will have lower monthly payments than a high-premium plan. However, if you face unexpected or major medical expenses, a high-premium plan would be the better option due to its greater coverage and protection.

Is It Better to Pay Higher Premiums Or Higher Deductibles?

To answer that question, you have to look at how you will use your insurance. Are you an ill person, or someone with a pre-existing condition who needs to see a doctor weekly? If your answer is yes to that, then you want a higher premium to give you lower deductibles. If you are fit healthy and avoid the doctor at all costs, then you want a plan with lower a premium and higher deductibles. Assess your needs, before making a purchase.

Compare Health Insurance Quotes With Coverage Guru

It’s important to consider both premiums and deductibles when choosing a health plan in order to find the right balance for your needs. A high premium plan may provide more coverage and protection, but it will also come with higher monthly payments. A low deductible plan may have lower monthly payments, but it won’t cover as much if you have major medical expenses in the future. Before deciding on a plan, make sure to educate yourself on what type of coverage each offers so that you can easily decide which one works best for you. If you are ready to take the plunge, and purchase some health insurance, then Coverage Guru is a great place to start.

Coverage Guru takes the pain and hassles out of shopping around for health insurance plans by letting you compare quotes in your area side by side. To get started, enter your zip code, and get coverage for you and your family as quickly as today.

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