What is a deductible in health insurance and how does it work? This question and the answer for it are essential for everyone who wishes to buy a health insurance policy. Health insurance transaction between an insurance company and its potential clients is not a strictly standardized deal, despite the fact that many people believe so. In fact, it is a contract that involves intense negotiation about various aspects of the policy, one of which is deductible.
What Is a Deductible in Health Insurance?
In health insurance, a deductible is basically an agreed portion of medical expenses that an insured party must pay before the insurance company can provide compensation to cover the rest of the expenses up to the limit outlined in the policy. With deductible, medical expenses are paid with the insured party’s own money first before the insurer steps in to cover the difference. A deductible is not exclusive to health insurance as it is also found in other types of insurance.
The exact amount of deductible is defined by the negotiation between the insurer and the insured party when the latter purchases a policy. This negotiation is expected to be beneficial for both the insurer and the client. Therefore, the agreement concerning the amount of deductible is always tied to that concerning the premium cost. Generally speaking, the higher the deductible is, the lower the monthly premium cost the client has to pay. In the same manner, lower deductible will incur only marginal reduction of premium cost.
How Does Deductible Benefit both the Insurer and the Insured Party?
Deductible is necessary in a health insurance negotiation as it gives leverage to the insurance company to offer competitive policies while maintaining profitable business. An insurance company will specify premium cost by taking into account the risk of payout that the company has to make for every claim. Clients who are likely to make a claim thus have to pay higher premium cost to make sure that the company can gain profit.
With deductible, the premium cost of a health insurance policy can be reduced. If clients are eager to take higher deductible for their insurance policy, the premium cost of their insurance can be significantly reduced. The benefit of this premium cost reduction is clear for the clients, but it is actually also clear for the company. Clients who take high deductible will try not to incur enough health care expenses to exceed the deductible amount. Since claim is less likely to be made, the company can benefit from the lower risk of payout.
People with good health will prefer to take high deductible or catastrophic plan because they wish to benefit from the significant premium cost reduction that the deductible offers. They often do not worry about the high deductible that they have to bear as their good health can be considered an assurance that they will least likely make frequent hospital visits and have to deal with high health care expenses. Of course they will be in a problematic situation if some unexpected accident that causes them to suffer serious health problem occurs.
How Does Deductible Work?
When clients experience an accident that requires them to be hospitalized or to pay medical expenses, they will try to make a claim. In doing so, the insurance company will require them to take from their own pocket money amounting to the amount of the agreed deductible to pay for a portion of the expenses. The company will then cover the rest of the expenses. For example, if you are suffering from a certain illness that results in $ 2,000 worth of medical care and you have taken a deductible of $500, you only need to pay $500 to the hospital. The insurance company will then step in and cover the remaining $1,500. However, it is important to remember that the company will provide full coverage minus the deductible only if the coverage is still within the limit outlined in the policy.
Some Important Facts about Deductible in Health Insurance
The following facts are considered important if you want to take deductible when purchasing health insurance plan.
- Not all health insurance plans include deductible.
Some health insurance plans are no-deductible, meaning that they don’t require you to pay out-of-pocket costs when receiving healthcare services. Employer-based insurance plans are mostly no-deductible, but some insurance plans that you can buy on your own may also be no-deductible. Although no-deductible plan provides full coverage to your medical expenses, their premium cost is mostly expensive.
- Even if you have to pay a portion of your medical expenses as well as monthly premium, having a deductible plan is still considered more cost-effective than not having any insurance plan at all.
This is because your insurer will try to negotiate with the healthcare service provider so that you can get discount. If you are not protected by any health insurance plan, the medical expense that you have to pay is often twice or three times more expensive than it is if you are protected by a health insurance plan.
- Deductible in health insurance can be different from that in other types of insurance.
If you take deductible plan in your homeowner or auto insurance policy, you will not receive the necessary service until you pay the deductible. In health insurance, you can still get the service even if you haven’t met your deductible.
- Preventive care is covered fully by your insurance.
You have to pay out-of-pocket costs only if you undergo curative medical care. Any preventive cares, such as immunization and screenings, are fully covered by your insurance plan. You don’t have to pay for those cares using your own money even if their cost is still within your deductible limit.
Different insurers, however, have different policies regarding their deductible plan. It is thus important for you to consult your insurer to learn more about all details concerning the insurer’s deductible plan and to get more comprehensive answer for the question what is a deductible in health insurance and how does it work.
- are health insurance premiums tax deductible
Are Health Insurance Premiums Tax Deductible?
As people are getting prepared for annual tax return filing, one important question often lingers in their mind: are health insurance premiums tax deductible? The answer for this question is not a simple yes or no. The health insurance premiums that you pay every month may or may not be eligible for tax deduction. This eligibility is tied to the regulation enacted by the IRS. Although many people are often confused about this regulation, it is actually fairly easy to understand. You need to know the basic problem this question carries: in what situation health insurance premiums are tax deductible and in what situation they are not. You also need to know what qualifies you for medical expense deduction.
When Are Health Insurance Premiums Tax Deductible?
Health insurance premiums may be tax deductible if you pay them out of your own pocket. If you are self-employed, your health insurance payments are often fully deductible. Other healthcare-related expenses, including payments for medications and medical services as well as copays, may also be deductible. Even any payments that you have to make after your health insurance policy has paid the healthcare service provider may also be deductible. This rule applies not only to individual health insurance plan, but also family plan. As long as you pay all of the costs out of your own pocket, then the money that you spend is deductible. In brief, any after-tax payments that come from your own pocket are very likely to be deductible.
When Are Health Insurance Premiums Not Tax Deductible?
Health insurance premiums will least likely be tax deductible if you don’t pay them using your own money or if you pay them using pre-tax money. Here are some scenarios in which this situation may occur.
- If you are an employee whose health insurance premiums are paid by your employer or the government, you cannot claim tax deduction for the payment.
- If your employer pays a portion of your health insurance premiums, you cannot claim tax deduction for the portion your employer pays. If another portion of the premiums is paid using your paycheck pre-tax, that portion is also not tax deductible as it is already tax-free. You can only deduct the portion of premiums that is paid using your paycheck after-tax. You can consult your employer or HR officer to learn more about the tax status of the paycheck that is used to pay your portion of the premiums.
- If you receive subsidy because you buy your health insurance plan from insurance marketplaces that are run by either state or federal government, you cannot claim tax deduction for the subsidy. Again, you can only deduct the portion of premiums that you pay from your own pocket.
We have mentioned above that any payments for medical services and medications are deductible; however, they are deductible only if you pay them using your own money and thus are no longer deductible if they are paid by your insurer. We will disclose all types of medical expense that are and are not deductible in the following sections.
Medical Expenses that Are Deductible
If you instead of your insurer pay for the following medical expenses, they are most likely to be deductible.
- Medical services and medications
If you pay for your medical services and medications using your own money, the expenses are deductible.
- Medical equipment and facilities.
If your doctor requires you to use wheelchair and to build a ramp at home, you can mostly deduct the expenses.
- Travel expenses
Although these expenses are often overlooked when assessing your tax deduction, they are actually tax deductible.
- The cost of drug and alcohol abuse treatment
If you want to escape from alcohol or drug addiction, the expenses that you pay can be counted on Schedule A.
- The cost of stop-smoking program
If you intend to stop your smoking habit by joining a stop-smoking program, which costs you certain amount of money, the expense is likely to be deductible.
- The cost for attending medically necessary medical conference
If a medical conference in some distant place can provide you with solution for overcoming your chronic illness, your transportation and lodging expenses might be deductible.
- The cost of purchasing and installing medically necessary home appliances.
If you suffer from allergies and your doctor requires you to install a humidifier to your home’s HVAC system, the purchasing and installation cost of the humidifier might be deductible.
- The cost of medically necessary weight-loss program
If your obesity and cardiovascular disease require you—according to your doctor’s recommendation—to follow a weight-loss program, any related expenses might be deductible.
Medical Expenses that Are Not Deductible
Some of expenses that are mentioned above, if they are not medically necessary, are not deductible. Weight-loss program, for example, is not tax deductible if it is done to enhance your appearance. Other medical expenses that are not deductible include cosmetic treatments, funeral expenses, and cost of childcare for healthy baby. You can refer to IRS’s Publication 502 to learn more about all medical expenses that are and are not tax deductible.
Limitation Regarding Tax Deduction for Health Insurance and Medical Expenses
Just because you pay your health insurance premiums and other medical expenses using your own money doesn’t mean that your entire expenses are deductible. The government has affirmed that your expenses will be tax deductible only if they exceed 10% of your adjusted gross income. Adjusted gross income is calculated by adding all incomes that you get from your wages and investments, among others, and then subtracting them with certain business-related expenses, college tuition, alimony, and many others. For example, if the adjusted gross income of you and your spouse is $150,000 and you spend $20,000 to pay for medical expenses that are qualified for tax deduction, only $5,000 of that amount is tax deductible. This number is acquired by subtracting 10% of your adjusted gross income ($15,000) from your total medical expenses ($20,000). If you and your spouse are 65-years old or older, the threshold is 7.5% instead of 10%.
The tax deduction status of your health insurance premiums and medical expenses depend on various conditions. So, are health insurance premiums tax deductible? If you can understand those conditions, it should not be difficult for you to answer that question.