Deductible

Definition

Tax Deductible

In the realm of taxation, a deductible refers to any expense that can be subtracted from a taxpayer’s gross income when calculating income tax liability. Common examples include business expenses, mortgage interest, charitable donations, and certain medical expenses.

Insurance Deductible

In insurance terminology, a deductible is the amount the policyholder must pay out of pocket before the insurance company begins to cover the expenses. Deductibles can be structured in two main forms:

• Absolute Dollar Amount: This is a specific dollar amount that the insured must pay before the insurer contributes. Generally, a higher deductible results in lower insurance premiums.

• Time Period Amount (Elimination or Waiting Period): This form of deductible, often used in disability income policies, denotes the period the insured must wait after the onset of a claim before any benefit payments are made by the insurer. The longer the waiting period, the lower the premium.

Examples

1. Tax Deductibles:

   • Business Expense: A business owner deducting purchase costs of supplies from their gross income.
   • Medical Expenses: A taxpayer deducting the portion of medical expenses exceeding 7.5% of their adjusted gross income.

2. Insurance Deductibles:

   • Health Insurance: An individual has a $1,000 deductible on their health insurance, meaning they pay the first $1,000 of medical bills before the insurance starts covering the costs.
   • Auto Insurance: A driver with a $500 deductible on their auto insurance must pay the first $500 of repairs after an accident, with the insurer covering the rest (up to policy limits).

Frequently Asked Questions (FAQs)

What is the purpose of a deductible in insurance?

A deductible helps prevent small or minor claims that might be costly for the insurance company to process and helps keep premiums lower for policyholders. It encourages careful behavior and minimizes risk.

Can I choose my deductible amount?

Yes, most insurance policies allow policyholders to choose their deductible amounts. Typically, selecting a higher deductible will lower the premium, reflecting the policyholder’s greater share of initial expenses.

Why are some deductibles based on time periods?

Time period deductibles, such as waiting or elimination periods, are often used in disability income and other long-term insurance policies. They help manage the cost and timing of payouts, ensuring that immediate short-term claims do not overwhelm the system.

Can deductibles be waived under any circumstances?

In some cases, an insurance company may waive deductibles under special conditions or for specific types of claims, such as on comprehensive coverage when the vehicle is a total loss.

Are all business expenses deductible for taxes?

Not all business expenses are fully deductible. The IRS has specific rules and limitations on which expenses can be subtracted from gross income to give a net taxable income.

Related Terms

• Coinsurance: The percentage of costs that an insured must pay after the deductible is met and the insurer’s share begins.

• Copayment: A fixed amount paid by the insured every time certain services, such as visits to a doctor, are used, regardless of the deductible.

• Premium: The amount of money charged by the insurer to the policyholder for the coverage set forth in the insurance policy.

Online Resources

1. IRS Tax Deductible Information
2. Healthcare.gov Deductible Definition and Examples
3. Investopedia - Understanding Insurance Deductibles
4. National Association of Insurance Commissioners (NAIC)

Suggested Books for Further Study

1. “Tax Savvy for Small Business” by Frederick W. Daily
2. “The Complete Idiot’s Guide to Accounting” by Lita Epstein, MBA
3. “Health Care: A Community Concern? Developments in the Organization of Canadian Health Services” by Anne Crichton
4. “Personal Finance For Dummies” by Eric Tyson
5. “Understanding Health Insurance: A Guide to Billing and Reimbursement” by Michelle Green

Fundamentals of Deductible: Insurance Basics Quiz

### What is the primary benefit of a higher deductible on an insurance policy? - [ ] Increased coverage limits - [ ] Faster claim processing - [x] Lower insurance premiums - [ ] Longer waiting periods for claims > **Explanation:** Higher deductibles generally result in lower insurance premiums because the policyholder agrees to assume a greater portion of the initial costs. ### Which of the following best describes the term 'waiting period' in insurance? - [ ] The period the insurer takes to process claims. - [x] The period the insured must wait for benefits to begin. - [ ] The time taken to receive the insurance policy document. - [ ] The time until the deductible resets yearly. > **Explanation:** The waiting period in insurance is the length of time an insured must wait before receiving benefits. ### How do deductibles affect out-of-pocket costs? - [ ] Lower deductibles increase out-of-pocket costs. - [ ] Deductibles have no effect on out-of-pocket costs. - [x] Higher deductibles increase out-of-pocket costs. - [ ] Deductibles only affect premium costs. > **Explanation:** Higher deductibles increase out-of-pocket costs as the insured must pay a larger amount before the insurer's coverage begins. ### What is a deductible in the context of a tax return? - [ ] The amount owed in taxes. - [ ] The total tax paid. - [x] An expense that can be subtracted from taxable income. - [ ] A fine for late tax payments. > **Explanation:** In tax returns, a deductible is an expense that decreases the taxable income. ### In which scenario is an insurance deductible typically waived? - [ ] Every time a claim is filed. - [ ] When premiums are increased. - [x] Under specific conditions as defined by the insurance policy. - [ ] When the policyholder requests it. > **Explanation:** Insurance deductibles may be waived under specific policy conditions or for certain types of claims. ### How does a time period deductible benefit the insurance company? - [ ] By providing immediate coverage. - [ ] By ensuring all claims are paid quickly. - [x] By staggering the payment of claims over time. - [ ] By increasing the total premium amount. > **Explanation:** Time period deductibles stagger the payment of claims, managing the insurer's immediate financial outflows. ### What factor is most likely to influence the amount of a deductible in an insurance policy? - [ ] The policyholder's credit score. - [x] The level of premium the policyholder selects. - [ ] The country's regulations. - [ ] The insurance company's location. > **Explanation:** The deductible amount is influenced by the level of premium the policyholder selects, with higher deductibles generally resulting in lower premiums. ### Can medical expenses always be deducted from taxable income? - [ ] No, they must exceed a certain percentage of adjusted gross income. - [ ] Yes, always. - [ ] Only if prescribed by a doctor. - [ ] Only for dependents. > **Explanation:** Medical expenses can be deducted from taxable income if they exceed a specified percentage (usually 7.5%) of the adjusted gross income. ### What is coinsurance in health insurance? - [ ] A supplement to premiums. - [ ] A type of deductible. - [x] The percentage of costs paid by the insured after meeting the deductible. - [ ] An upfront payment for services. > **Explanation:** Coinsurance is the percentage of medical costs that the insured must pay after meeting the insurance deductible. ### Why might someone choose a lower deductible on their insurance policy? - [ ] To increase their monthly premium. - [x] To decrease out-of-pocket expenses when filing a claim. - [ ] To lengthen the waiting period for claims. - [ ] To reduce coverage. > **Explanation:** Choosing a lower deductible decreases out-of-pocket expenses when filing a claim, although it usually results in higher premiums.

Thank you for deepening your understanding of deductibles with our comprehensive dive and challenging basic quiz questions! Keep striving for excellence in your insurance knowledge.