What is a deductible?
A deductible as stated on Wikipedia “is the amount of expenses that must be paid out of pocket before an insurer will pay any expenses.” The goal of a deductible from the insurance company’s point of view is to reduce the number of small claims that are made by their insured clients. In the case of car insurance, if your vehicle is accidentally scratched and the repair costs $50 while your deductible is $500, not only are you unlikely to fix the issue yourself but due to the discrepancy between claim amount and your deductible you would typically never even bother interacting with the insurance company regarding this issue. The benefit to the insurer is that because you never interact with them, they not only don’t have to issue a reimbursement but they also don’t have to spend money on the shuffling of paperwork that would be required to service such a tiny claim. As a result of these savings benefits to the insurance company, insurance premiums are usually less expensive when the deductible level is higher.
Remember that the insurance company makes money in two main ways: i) underwriting income, and ii) investment income. Underwriting income is derived from the difference between insurance policy fees paid by customers like you over a specified period of time and the amount of money that’s paid out in reimbursements and operating expenses in the same period of time. Investment income comes from the insurance company investing the collected insurance policy fee monies and reaping the interest rewards that come from possessing that large pot of money.
Keep this in mind…
That said, when it comes to pet insurance be sure you know the details of your plan well. For example, in the case of Trupanion, because their deductibles are per condition it’s important that you always file claims regardless of whether the bill is below the deductible amount. The reason is that in the per condition case, the claims that you submit are additive. As you submit claims for a specific condition the claimed amount increases until you ultimately reach the deductible limit. Once you’ve met your deductible for a particular condition, it is met for the life of your pet’s policy for the same condition. They also point out that the number of submitted claims has no bearing on your monthly premium.
Annual versus incident deductibles
Pet insurance plan deductibles usually come in two flavors i) annual and ii) incident. Annual deductibles as the name suggests are time based deductibles. When the new insurance year starts any claims you make against covered medical bills are added up until the annual deductible level is met. Further claims beyond the deductible amount will result in the issuance of a reimbursement. It does not matter that Fido hurt his foot in one claim, then came down with another ailment in the second claim. In contrast to the annual deductible, the incident deductible is related to specific incidents and therefore restart with each medical expense claim. This type of deductible can be set on a lifetime per condition basis.
As an example, let’s assume an injury to Fido’s knee that costs $1000 and a sickness that leads to $800 worth of covered medical treatment. In the incident deductible case, assuming a deductible of $500, you would be reimbursed $500 for the knee and $300 for the sickness. So of the $1800 in expenses you’d recoup $800, that is you’ve paid the deductible twice. In the case of an annual deductible, assuming a deductible of $100, you’d pay the deductible once and be reimbursed $1700.
But the lesson here isn’t that annual is necessarily better. Let’s assume that Fido’s knee trouble persists for 6 total years and each year you pay the same $1000 in expenses. Total expenses over the course of 6 years is $6000. In the annual deductible case you’d be reimbursed: $900 + $900 + $900 + $900 + $900 + $900 = $5400. In the incident deductible case you’d be reimbursed: $500 + $1000 + $1000 + $1000 + $1000 + $1000 = $5500. In this specific example scenario the annual deductible option is preferable in the early years of a chronic condition. At year 5, the reimbursed amount are equal at $4500. In the subsequent years the per incident deductible option becomes preferable (** be sure to run the numbers yourself and consider the details of the specific plans you are comparing).
What is copay?
Once you’ve reached your deductible limit, the insurance company is responsible for paying a percentage of the medical expenses. Let’s look at a couple of scenarios, for your young pet that just suffered an accident costing $2000 in veterinary medical expenses. Let’s assume that your deductible is $500 and all expenses incurred for this incident are covered:
- Your copay is 0%
- In this case you’d pay $500 out of pocket to cover the deductible. This leaves $1500 remaining. Because the copay is 0% your insurance provider will issue a reimbursement to you of $1500.
- Your copay is 10%
- In this case you’d pay $500 out of pocket to cover the deductible. This leaves $1500 remaining. Because the copay is 10%, you will cover $150 and your insurance provider will cover 90% and will issue a reimbursement to you of $1350.
The idea with copay or copayment is that the amount of covered expenses that are above the deductible amount will be split between you and the insurer. So a copay percentage is the amount that you’ll pay and 100 minus the copay percentage is the amount that the insurer will cover.