If you have insurance, you have likely heard the term out-of-pocket expenses. There are different types of insurance where insurance and out-of-pocket expenses are relevant.
For example, if you’re hurt in a car accident, you may have out-of-pocket expenses. These might be medical bills, and you could be reimbursed for what you paid out-of-pocket by the other driver’s insurance company if you weren’t at fault.
In the case of a car accident, you should document all the expenses you pay for, with the idea that you’ll hopefully get reimbursed.
Health insurance out-of-pocket costs work a little differently, and we’ll detail what to know below.
The Basics of Insurance and Out-of-Pocket Expenses
Out-of-pocket expenses are generally what someone has to pay for from their reserves of cash. We see them sometimes talk about work expenses or things related to your business. Still, they’re most often used about health insurance costs that are the policyholder’s responsibility.
An out-of-pocket expense may be reimbursed later or not. If it’s work-related, the employer usually reimburses it.
If it’s your health insurance, your out-of-pocket expenses are whatever your share of your covered healthcare costs is, including what you pay for copays, deductibles, and coinsurance.
Health insurance plans have maximums for out-of-pocket expenses capping what you’re responsible for paying yearly.
These expenses are what portion of your bill your insurance isn’t covering in healthcare.
The Affordable Care Act, passed in 2010, required group and individual plans to stay within guidelines updated annually for out-of-pocket maximums unless they have a special exception.
For 2022, the out-of-pocket limits are $8,700 for an individual and $17,400 for a family. Plans can’t have maximums that are more than that, but many have lower maximums.
How Is a Deductible Different From an Out-of-Pocket Maximum?
When you have health insurance, you have a deductible. You must pay the deductible every year for your covered costs before your coverage kicks in. Once you meet the deductible, then as the policyholder, you share the costs with your insurance plan through coinsurance.
For example, if you have an 80/20 plan, as a policyholder, you pay 20% of the costs. The plan then picks up your remaining 20%.
What you pay for coinsurance, copays, and deductible goes towards your out-of-pocket maximum every year.
Once you reach your maximum, your insurance plan pays 100% of your covered costs throughout the year.
How Do Deductibles Work?
A deductible for your health insurance is a specific amount you have to pay before your insurance starts to pay your medical costs. If you have a $1,000 deductible, you must pay that out-of-pocket before your insurance covers anything. It might take months to reach that amount or a single visit.
Your deductible is paid directly to the provider or place you receive care.
You don’t pay a deductible to the insurance company.
Once you meet whatever your deductible is, your insurance company starts to pay for your medical expenses if they’re covered.
Your deductible automatically goes back to $0 at the beginning of your policy period. Most of these are a year long. Once your new policy period starts, you again pay the deductible.
Even after meeting your deductible, you still might have out-of-pocket costs, but your insurance company will pay some of the charges.
Your premium is what you pay to an insurance provider every month. It’s the only payment you are responsible for if you don’t use your health insurance. You pay premiums as long as you have insurance, but a deductible is only paid if you’re using your insurance.
The premium prices go up for everyone you’re adding to your plan. For example, a married person covering their spouse will have a higher premium than they would for just themselves.
If you have insurance through an employer, your premium might be taken directly from your paycheck. A lot of companies cover some of the premium.
Copays and Coinsurance
A co-payment is how much of your insurance claim you’re responsible for covering. If you go to a doctor’s visit, they’ll usually require you to make your copayment at the time of service.
A copay is typically a fixed amount, varying depending on your plan. Sometimes, rather than a copayment being a set amount, it’s a percentage.
If you go to a provider or clinic outside your insurance provider’s network, you may have a different copay than if you’d gone in-network.
Some insurance plans will limit the percentage of your claims they’ll cover, in which case, you’re responsible for the remaining percentage, which is coinsurance.
Once you meet your deductible, your insurance company might pay 80% of your expenses for healthcare. Then, you’d have to pay the rest—20%.
Coinsurance isn’t something you start paying until after you meet your deductible.
Out-of-pocket expenses can apply not only to health insurance coverage but also to car insurance. In this context, you might have to pay out-of-pocket damages to cover repairs to damaged property or a damaged vehicle. You might also pay out-of-pocket if you don’t want your insurance costs to soar, even if your company would cover the damage.
If you don’t have car insurance and there’s any damage to your vehicle, it would mean you have to pay out-of-pocket, but this is something to avoid even if you live in a state where you aren’t legally required to have auto insurance.
Car insurance usually has deductibles like health insurance. You’re responsible for paying up to that before your insurance coverage kicks in.
The deductible is something you choose at the time you add a vehicle to your policy. If you have to get your car repaired, you’ll usually pay this when you pick it up.
The higher your deductible or out-of-pocket expenses, the cheaper your monthly auto insurance premiums will be.
There are situations where your car might be damaged, and it’s less to repair than your deductible, so you will cover the repair costs in this situation. Your car insurance covers only the damages that are beyond the amount of your deductible.