TX Insurance: Deductible vs. Premium
Overview of a Deductible in Texas
The premium and the deductible in Texas are out-of-pocket costs; however, they differ in how the costs are incurred and how they are utilized. While premium is a regular payment paid by you (the policyholder) to the insurer, to keep the policy active; you only pay the deductible when you file a claim. Health insurance policies are a bit different. Texas health insurance plans require payment of deductibles annually, where the insured must pay the deductible before the insurance provider starts paying for covered expenses.
For instance, if you have a $1,000 deductible and $50,000 in medical bills, first you must pay the deductible of $1,000 before the insurance provider pays for the rest of the covered medical expenses. If your medical bills total $800, you pay the full $800 out of your pocket and will still need to cover the remaining $200 during the next medical visits, before the insurer’s coverage kicks in.
Insurance premium and deductible are both costs an insured cannot avoid paying in Texas. However, unlike premium, the insured has specific control over choosing the amount of deductible. When selecting the deductible amount, the insured must consider their financial capability and what they can afford. Talk to a Texas-licensed insurance professional to find the right insurance coverage, for an affordable premium
What is a Deductible in Insurance?
Deductible in insurance is the monetary portion of risk you are willing to take on in case the risk occurs. The needs of every insured differ, and choosing the right deductible to pay comes down to your financials. The premium amount determines the deductibles; if the deductible is low, the premium is high, and if the premium is lower, it means a higher deductible.
What Does Deductible Mean in Texas?
A deductible is used to share risk between the insured and the insurance provider, and it ensures that the insured has a stake in any claim they make. In Texas, a deductible is the dollar amount or a percentage of the total amount of an insurance policy an insured pays before the insurance provider pays the claim.
An insured using the dollar (also known as Flat) amount deductible agrees to a specific amount be taken off (deducted) from the claim payment. For example, Texans must pay deductibles for automobile insurance coverage for collision, comprehensive, and uninsured/underinsured motorists. So if you have a collision claim of $10,000 in damages with a $500 deductible, the insurer deducts $500 from your claim amount and pays you the remaining $9,500.
Residential insurance: Percentage deductibles are primarily used in a homeowners and renters insurance policy, and the deductible is sometimes calculated based on the value of the home insured. For instance, a property valued at $100,000 with a 2% deductible means the insurer will remove $2,000 from any claim payment, so if the claim is for $50,000 in damages, you will be paid $48,000.
However, note that a special deductible may apply under the homeowners’ and renters’ insurance policies, because of the risk coverage. For instance, hurricane and wind/hail deductibles are special deductibles that mostly use percentage deductibles and are usually higher than other standard homeowners and renters policy deductibles. The insurance provider may require you to pay from 1% to 10% of the policy limits.
It is possible to have an insurance policy with no deductible, known as zero deductible. A zero deductible plan means that you do not need to pay anything before the insurance provider starts paying for your claims. However, zero deductibles come with higher associated premiums, because deductibles were designed for you as the insured to share the risk of a loss with the insurance provider. Buying zero deductible insurance coverage means the insurance provider is carrying the risk all alone. So in a Texas auto insurance policy, with collision coverage set at zero deductible, if you have a claim of $2,000, the insurance provider reimburses you the full $2,000.
PROs and CONs of an Insurance Deductible in TX
Deductibles are an essential aspect of an insurance policy, and it plays an important role in determining the premium and how much risk an insured is willing to share with the insurer. The following are some of the pros and cons of deductibles in an insurance policy:
Pros:
- Choosing a higher deductible lowers your monthly premium payment.
- If you rarely use your health benefits in a health insurance policy, a higher deductible may help you save more money.
- If you expect to use your health benefits extensively during the year, a lower deductible may help you save more money.
- Your premium rate won’t just increase after a covered loss because the insurance provider considers the cost and severity of your claim to determine if it will.
Cons:
- You may spend more in the event of a claim if you delay in reporting your claim to your insurance provider, who may not pay for any other additional loss or damage caused by your delay.
- High deductibles will not lower the premium significantly.
- If you need surgery under your health insurance policy, you must settle the deductible before the insurance provider can pay your claim.
Deductible does not have to be set and forgotten forever. You can modify the deductible amount at any time, according to your current insurance needs. Always try to discuss your deductible options with a licensed insurance agent in Texas, who can explain the implications of your specific decision. Inquire with an agent for alternative strategies to cover the high deductible with a secondary low-cost insurance policy.
Do All Insurances Have Deductibles in Texas?
No, deductibles do not apply to all insurance policies or coverages in Texas. Insurance types that do not have a deductible:
- Life insurance does not have deductibles, because the payout of the benefit is considered personal expenses. This means that the beneficiaries of life insurance policies do not have to pay deductibles before the insurance provider pays the death benefit.
- Liability insurance does not have deductibles because the insurer will often pay the entire liability cost within the coverage limit. For example, when the insured has to pay for bodily injury and property damage after running into a car on the road.
What is a Premium in Insurance?
Premium in insurance is the fee paid by the insured (you) to the insurer (your insurance company) for providing the coverage. Regardless of the type of insurance, premium is a prerequisite to keep the policy alive.
What is Insurance Premium?
Insurance Premium is the money an insured pays to the insurance provider in exchange for coverage. The payment of premium in Texas may be monthly, quarterly, semi-annually, or annually. Some policies require payment of a deposit premium which is an estimated fee you pay in advance when the policy is issued and may be adjusted due to actual exposures to the risk. Under the health insurance plan, you may qualify for a premium tax credit which is a refundable credit that covers a portion of your premium if you purchased from a provider in the health insurance marketplace.
How is Insurance Premium Determined?
To determine the appropriate premium amount, the insurer relies on actuaries to do the work. Insurance actuaries use math and statistics in figuring out the premium you must pay, based on the types of policy you are purchasing, your location, and all the relevant risk factors at play:
Life insurance - among other things, the insurance provider considers your personal information, including age, health, habits, smoking, alcohol intake, and medical records.
Health insurance - most insureds in Texas get their health insurance coverage through their employer’s group health plan, so the premium cost and options are set depending on the company’s coverage and negotiated rates. However, any Texas resident may purchase a number of other health insurance products, where the premium is not locked in and can be chosen to match the exact needs of each insured. In that case, factors like what kind of insurance is available, the number of companies competing on the exchange, and the number of people buying insurance through the exchange will be considered. The insurance provider will also pay attention to other factors like your age and whether it covers dependents.
Auto insurance - when buying automobile insurance in Texas, the insurance provider will look at certain factors like your driving records, traffic citations, license suspension, and driving accidents accessible at the Texas Department of Motor Vehicles. For instance, a driver with a clean record will usually get a substantially lower premium than a driver with a record filled with accidents and violations. Note that the insurance provider may re-evaluate your rates after making a claim or driving infractions that are your fault, unless you get a claim forgiveness feature added to your policy.
Homeowners, Renters, and Commercial insurance - the insurance provider uses the property’s age, size, value, location, and other relevant factors. For instance, homes and businesses located in the areas susceptible to flooding or tornadoes tend to carry higher premiums.
Other factors the provider considers may include the amount of coverage the insured needs, the likelihood of making a claim, the history of claims, the deductible amount, type of business, and insurance history. Note that even after the policy terms have been determined, the premium may increase due to certain factors, like submitting a claim during the policy term or increasing the risk associated with the policy.
How Does Deductible Affect Premiums?
When choosing insurance coverage in Texas, there are three things an individual or business must keep in mind:
- Amount of needed coverage,
- Desired deductible, and
- Affordability of the premium.
The premium the insured agrees to pay directly impacts the amount of the deductible. Where an insured has a low monthly premium, the deductible will be higher, and where they have a high monthly premium, the deductible will be lower. When deciding the deductible, the insured must consider how much they can afford when the loss occurs and how often they may need to use this insurance. This is especially important for a health insurance policy.
Choosing a plan under a health insurance policy requires you to consider the premium and the deductible percentage you are willing to take on. You can take the following into perspective when determining your premium and deductible plan:
- You might need to use your insurance more often if you have small children or a family member with a disability or other health challenges requiring regular doctor visits. If this matches your situation, you may want to consider a plan with a higher premium and lower deductible.
- You might not need to use your insurance often if you rarely visit the doctor. If this sounds like you, then you may want to consider a plan with a lower premium and higher deductible.
So, when deciding on the deductible and premium, an insured has to consider how they want to use the insurance benefits. If it is unlikely that the insurance will be used often, you can consider taking on a lower premium and higher deductible. However, if there is reliance on insurance, for instance, health plan, the insured may consider higher monthly premiums and lower deductibles.
How Do You Pay Insurance Premiums in Texas?
When an insured agrees to pay a certain amount of premium for the coverage to be provided by the insurer, they have to know how to pay their premium. Insurance premiums in Texas can be paid the following ways under the different policies:
Health insurance: an insured pays an insurance premium monthly for a health insurance plan, whether or not the coverage is used. Note that you are solely responsible for paying your premium except for when you qualify for federal assistance or if your employer is paying a portion of it.
Auto insurance: insurance providers allow an insured to choose how the premium will be paid. The most common options are monthly, twice a year, or annually. Note that if you pay an annual lump sum, you may get a discount. However, an at-risk driver may be required to pay up the entire premium in full for the term upfront.
Commercial insurance: insured have the option of paying premium in full at the start of the policy or as recurring monthly payments. Various business owners resort to premium financing companies, who pay the premium as a one-time payment, and they in turn, pay the premium financing company in monthly installments. When entering into a contract with the premium financing company, you must make a down payment on your insurance which is usually set at 25%. Note that these premium financing companies are not fully regulated in the country, so they have the right to set their interest rates which are often between 10% to 20%.
Life insurance: The insurance providers have several modes of paying premium in Texas. Insurance premiums can be paid on a monthly, quarterly, or annual installment basis. There is also the option of paying premiums through premium financing commonly used by high net worth individuals. It involves you taking out a third-party loan to pay for your life insurance plan premium, where the loan is repaid using the proceeds of the death benefit.
Homeowners insurance: Insurance premiums are paid in two ways:
- Per month or per year to the insurance provider, based on your preference
- Paying monthly through mortgage payment if the homeowner’s plan premium is included in the mortgage payment. Usually, this requires an escrow account where a portion of the mortgage is set aside to pay for a premium.
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