How Embedded Deductibles Work in Health Insurance

Choosing a health insurance policy with an embedded deductible can make financial sense for many families because it allows a family member’s insurance benefits to kick in before the family deductible is met. Read on to learn more about embedded deductibles to help you make an informed decision during your next enrollment period.

Understanding how embedded deductibles work

Health insurance plan types vary significantly, but most plans have some sort of deductible. Deductibles are the amount of money you will pay out of pocket annually and do not include monthly premiums, copays, or coinsurance. You must pay the deductible before the insurance company helps pay claims under your specific policy.

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For example, suppose a plan has a deductible of $5,000. In that case, you are responsible for the first $5,000 out of pocket (aside from preventive services) before benefits kick in. The insurance company does not contribute to expenses until you have met the deductible. This portion of the process is called coinsurance, so for this example, after meeting the $5,000 deductible, insurance may cover 80% of costs while you still pay 20% up to your out-of-pocket maximum for the year.

Coinsurance lasts until you reach the out-of-pocket maximum, at this point, insurance typically must cover 100% of the eligible costs.

Types of deductibles

Health insurance terminology used when referencing deductibles often includes:

  • Individual deductible is the amount one person must meet before coinsurance begins.
  • Family deductible is the amount a family must meet before coinsurance begins for the entire family. This type of deductible is also called an aggregate deductible.
  • Embedded deductible is an individual deductible included in an overall family deductible.
  • High-deductible health plans (HDHP) have higher deductibles but lower monthly premiums. Health savings accounts (HSAs) are commonly available with HDHPs.
  • Low-deductible health plans have higher monthly premiums but lower deductibles.

Embedded deductibles: a closer look

When a family plan includes an individual deductible, it is called an embedded deductible, meaning the policy has both a family and an individual deductible. Embedded deductibles apply to some family plans but not all of them. Family plans include two or more people; therefore, embedded deductibles do not apply to individual plans for a single person.

With an embedded deductible, a family member can meet coinsurance requirements by satisfying the individual deductible but not the overall family deductible.

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For example, consider a family with an embedded individual deductible of $3,200 and a total family deductible of $6,400; one family member requires health services. If that family member meets the $3,200 deductible, insurance will begin to cover health care costs (coinsurance) for that individual per the policy. The member receives benefits without having met the family deductible of $6,400.

Once the member meets the individual deductible, any additional costs the member pays will go toward the out-of-pocket maximum but will no longer apply to the family deductible.

The remaining family members still need to pay out of pocket for services, with no coinsurance, until another family member either reaches the individual deductible or the family meets the deductible of $6,400. So, suppose another member of this family also meets the individual deductible of $3,200, the family deductible of $6,400 is also met.

When the family deductible is met, all family members are eligible for coinsurance benefits up to the out-of-pocket maximum. Once the out-of-pocket maximum is satisfied, all family members are covered at 100%.

Benefits of embedded deductibles

Embedded deductibles appeal to families because they can reduce overall health costs in certain situations. When one family member has higher health needs, embedded deductibles allow quicker coverage and access to insurance benefits. Individuals can get benefits sooner than if they first had to meet a higher family deductible.

Does an embedded deductible apply to you? Understanding your plan

So, how do you know if your health insurance has an embedded deductible?

Review your plan documents. Many plans provide members with online portal access to view plan benefits, claims, and other helpful information. Look under the deductible benefits section to determine if you have an individual and family deductible. An embedded deductible is not likely to say “an embedded deductible” but rather be listed as an “individual deductible.” Alternatively, you can reach out to your plan directly for clarification.

Considering your needs: choosing the right plan

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Choosing the right plan depends on your family's current and potential health needs. There are two kinds of deductibles for family plans: embedded or aggregated. Aggregate deductibles may also be called non-embedded deductibles. Deductibles renew annually and typically reset during the new calendar year. Your family's health needs and ability to pay for healthcare costs may help determine which type of plan is better.

Embedded deductible vs. traditional deductible: making an informed choice

The process of reaching embedded and non-embedded (aggregate) deductibles differs, but in both cases, health insurance plans pay 100% of eligible costs once the family deductible is met.

Embedded deductibles might be the best choice if you anticipate that one family member may have higher healthcare costs. For example, if one person requires back surgery, they may meet the individual deductible and have coinsurance contribute sooner, saving the higher out-of-pocket costs of meeting an aggregate family deductible.

Family deductibles without embedded (non-embedded) require the entire family deductible to be satisfied before insurance will contribute to cover claims. Imagine the same scenario: the person requiring back surgery may pay several thousand more dollars before insurance would contribute because the only option is to meet the family deductible.

However, one individual can't satisfy the family deductible with embedded deductibles. Once they meet the individual deductible, any additional costs go toward the out-of-pocket maximum but not the family deductible. This situation leaves other members to pay total costs until meeting either their individual or family deductibles.

Aggregate deductibles may cost less upfront but carry higher financial risks in case of an emergency. However, these plans may suit your needs if you have savings to cover potentially unexpected medical costs or if your family has high combined health needs.

Seeking professional advice

To learn more about deductibles, consult an insurance broker or agent. Additionally, if enrolling in an employer-sponsored plan, your employer's human resources department (HR) can answer questions or provide redirection. Alternatively, you can contact your insurance company representative to clarify current benefits. Health plan contact information is commonly located on your insurance card.

Understanding the cost implications of deductibles is critical when enrolling in family health insurance. Decisions can impact your overall financial health and budget. Although some medical needs are unexpected, others, like chronic conditions, are potentially easier to estimate. Armed with knowledge and resources, people can have more control when choosing insurance plans that best fit their families.

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