Health insurance can get pretty complicated. Typically, the point is to pay some money every month so that when you have an accident or get sick, your medical costs aren’t so expensive that they bankrupt you.
Two of the most important terms in health insurance are premiums and deductibles.
Your premium is that monthly cost. For many people who work for companies that offer health insurance, the premium comes out of your paycheck automatically.
Your deductible is very different. It’s a number that signifies an annual threshold, and it’s distinct for every plan.
Let’s say it’s $1,000. That’s the amount of money that you need to spend out of pocket on health care each year before your insurance starts covering your bills. Deductibles may range from a couple hundred dollars to several thousand.
These terms are related in one simple way — plans with higher monthly premiums (meaning you’re paying more every month), often have a lower deductible (meaning your insurance company will start paying sooner). You might want to pick a plan like this if you know you will have significant medical costs next year.
And the reverse is usually true too: Lower monthly premiums usually mean a higher deductible. This is probably better for healthy people who are willing to take a little more risk with their costs.
More from Invest in You:
Here’s how that works in practice:
Let’s say you pay a $100 premium every month and you have a $1,000 annual deductible.
You hurt your knee, go to the doctor, and find out you need to repair a torn meniscus.
The surgery costs $5,000.
You pay the first $1,000. As long as the procedure is in network, then your insurance starts to kick in.
Most plans pay a percentage of the remaining balance, typically around 80%. So of the $4,000 you still owe, your insurer will cover $3,200.
That brings your total medical bill up to $1,800, even though the whole surgery costs $5,000.
Of course, there are other costs and terms to keep in mind when talking health insurance, like copays and coinsurance, out-of-pocket limits, and knowing how your plan differs for providers in-network or out-of-network. But that’s for another video.
In the meantime, here’s to a healthier you.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.