It’s said that only two things in life are certain: death and taxes. I’m going to take the liberty of adding a third: health care costs will rise…and they’ll take health insurance up with them.
Some people take jobs just so they can get health insurance.
Since going without health insurance comes dangerously close to
committing financial suicide, we have to have it, and the options for doing it affordably are limited. One of the most obvious ways to do this is by raising your health insurance deductible.
How much money can you save with higher deductibles?
The more risk you take on (by having a higher deductible), the lower the premium. This is true in every kind of insurance, from liability insurance to health insurance.
The best way to make the case for higher deductibles is by using an example. The scenario we’ll use will be done through Assurant. I’ve chosen Assurant because it has one of the most customer friendly websites you’ll ever find, not because I’m endorsing the company or its products in any way.
We’ll use a family, living in California, with two children, both parents are 35-year-old non-smokers. Under the company’s “popular” CoreMed plan, the monthly premium with a $2,000 deductible is $898. (Please keep in mind that the family deductible is $4,000—double the individual deductible—but more on that later.)
If we raise the deductible to $3,500, the monthly premium falls to $644. That’s a savings of $244 per month, or $2,928 per year.
If we raise the deductible to $10,000, the monthly premium falls to $441, saving $457 per month, or $5,484 per year. A deductible this high is basically “catastrophic insurance” since you’ll be on the hook for all but the biggest claims.
As you can see, a lot of money can be saved with higher deductibles. I’ve presented only three variations, but there are many others. You can go higher than $10,000, but if you do you’re coming very close to being uninsured on many common medical procedures.
Multiple deductibles
If you have an individual health insurance policy, a deductible is a simple concept—one person, one deductible. But if you have coverage on your spouse and/or children, it gets more complicated.
Most policies with multiple beneficiaries contain two deductibles, one for each individual and one for the family as a group. For example, let’s say your policy covers you, your spouse and your two children. There’s an individual deductible for each person in the family—say, $2,000 per person. Then there’s a family deductible—say, $4,000.
If two people in the family incur significant medical treatment in the calendar year, you may have to pay as much as $4,000 in deductible expenses–$2,000 for each person. However, if all four members of the family have large medical expenses, your deductible would be capped at $4,000, the family deductible.
Unfortunately, in the language of health insurance, the term “deductible” is usually expressed as the individual deductible only. It may be said that your deductible is $2,000, but in reality it’s $4,000 since that’s the amount you could be on the hook for in a worst-case scenario.
Lowering the risk of a higher deductible
Health insurance deductibles are about risk. When we take a deductible, we’re betting that nothing will happen that will make us need enough health care that we’ll ever have to cover the deductible out of our own pockets. The higher the deductible, the greater the risk in the event that ever does happen.
Fortunately, risk as it pertains to deductibles can be precisely measured. If you raise your deductible from $3,000 to $5,000, you’re taking on exactly $2,000 in additional risk per individual. If the family deductible is twice the individual one, then you’re taking on $4,000 in additional risk. Since you know what the cost of the risk is, you can prepare for it.
And how you do that is through budgeting and savings. If you have enough in savings to at least cover the maximum deductible—and let’s use the family deductible, not the individual—then you have the risk fully covered. The larger your savings, the higher the deductible you can afford to have.
The type of savings you have will be important. It has to be pure savings–an emergency fund or “rainy day” fund—squirreled away someplace safe and liquid. Retirement accounts and investments don’t qualify since it can be almost guaranteed that your need to fully cover your deductible will coincide with a stock market crash.
When you should NOT raise your deductible
The main advantage to raising your health insurance deductible comes from the fact that in most years, you won’t use your health coverage enough that you’ll ever reach the full amount of the deductible. This assumes that you’re in good health and that you don’t lead a high-risk lifestyle. But that may not be possible for everyone.
If you have ongoing health conditions that require you to make heavy use of the health care system to the degree that you fully expect to hit your deductible every year, then raising your deductible will be the wrong strategy. If this is your situation, keeping your deductible as low as possible will save you the most money.
There are other ways to save on health insurance, but raising the deductible usually has the greatest impact. Talk to your health insurance provider and see what you can work out.
Kevin Mercadante is a professional personal finance blogger, and the owner of his own personal finance blog, OutOfYourRut.com. He has backgrounds in both accounting and the mortgage industry. He lives in Atlanta with his wife and two teenage kids.
I recently had surgery and was quoted $1900 for the hospital charge and $750 for anesthesia if I paid out of pocket. After the surgery was quoted my doctor submitted a letter to Cigna requesting that that the surgery be covered as “Medically Necessary”. After initially denying the request they reconsidered the request and approved the surgery. Since the surgery I’ve been watching my Cigna account to see how the claims are processed. To my surprise, the hospital submitted a claim for $20,865.28 for a surgery that was quoted at $1900. Sounds like insurance fraud on the part of the hospital. The claim still isn’t processed completely yet, but the Anesthesia that was quoted at $750 was submitted to Cigna at $1900 and adjusted down to $988. I’m going to fight with everyone on these charges. Besides the obvious insurance fraud that the hospital and Anesthetist are committing, I’ve also asked Cigna to reverse the processing on the anesthesia until the hospital charge is processed so that I’m only left with one large bill and several small 20% bills. The Claim Processor at Cigna insisted that since the claim was processed they can’t reverse the processing. Sounds like bullshit to me. They aren’t going to be cutting a check for the Anesthesia since they applied it to my deductible so I don’t understand why they can’t undo the processing. They’re always reversing claims to doctors and requesting fund to be returned to the insurance company so why not help me with this. If I’m left with four bills with medium balances it will cause more financial hardship versus one large bill paid over a few years.
I would greatly appreciate any suggestions on how to get Cigna to reverse a claim and reprocess after the higher claims are complete.
Hi Juli–you might want to consult with an attorney who specializes in this area. This sounds way too complicated for a generic answer. As well, much of how you handle this will depend on laws specific to the state you live in.
It does (GAWD! how I hate being interrupted by a pop-up ad when I start to write out a thought!)
Where was I?
Oh, yeah. Raising the deductible does save you some money. But it requires you to put your faith in the dubious idea that nothing much will happen to your home, your car, or your health…or that you can afford it if something does happen.
In an attempt to get day-to-day costs under control, I raised my homeowner’s deductible to $2,000 after I was laid off my job. I’ve paid homeowner’s insurance since 1967 and never had a major claim. So…I didn’t anticipate that a hail storm would cause over $12,000 worth of damage to my house!
Luckily, I was able to get the most crucial work done for the amount the insurer paid me, mostly by not having one repair job done at all. If I hadn’t raised the deductible, then all the repairs could have been done. As it is, some of the damage will simply never get fixed.
Very good point–that’s why it’s recommended that you assess your risk before raising the deductible. Some people shouldn’t–those reasonably likely to be filing claims. And even if you do, you should have an equivalennt amount of money in savings.
The flip side of course is that if you’re in good health and unlikely to make a major claim in a typical year, then keeping a low deductible will mostly be a waste of money.
Jessica – I assume that by “almost worthless” you’re referring to the rate of interest on the money market account? But the money sitting in that fund is doing exactly what it’s supposed to do–gathering dust (low interest) for the day when it’s needed.
The emergency fund is what enables you to save money on your health insurance premiums, and that’s worth a lot more than higher interest!
My husband and I save money by having a higher deductible, too. We minimize that risk, however, by adding that deductible amount into our emergency fund. Since our emergency fund is actually sitting in (almost worthless–LOL) money market, that deductible is sitting there building some interest, too. 🙂
High deductible insurance policies are particularly good for people who do not use their policy for a lot of routine doctor visits. If there is a significant problem, you will sustain a big deductible, but overall it is lower than the premiums you would have paid.
That’s so true–but there are people who are in good health overall who are keeping very low deductibles for “just in case”. Most people have a major medical clain only every few years, so if you’re paying for a low deductible, you may be paying for unnecessary coverage.