In my experience, a decent number of health insurance plans carve out an “individual” deductible separate from the “family” deductible. This is sometimes referred to as an embedded deductible system. Since I prefer simple terms, I normally call it a “per-person” deductible.
I like this model. If you are lucky enough to have it, it can help mitigate the financial risk of individual family members. Unfortunately, the concept often goes misunderstood by patients and their families. As deductibles continue to
rise explode, it is more important than ever to understand the difference between the individual and family deductible. We can even leverage this concept into our personal finance strategy.
But where do we start?
As usual, Max is here to sort all of this out.
What is a Deductible?
First things first, what is a deductible?
Generally, the deductible is a fixed amount we must pay before our medical insurance will start paying for our healthcare expenses. It typically re-sets each year on January 1st. Sounds easy, right? Not so fast.
The deductible is one of the hardest out-of-pocket hurdles to jump. Like most things, I like to consider it a bucket. We fill the bucket up as we consume healthcare services. The bigger the bucket, the harder it is to fill it up.
In some cases, a health insurance plan will have just one giant deductible bucket for the entire family. This is sometimes referred to as an aggregate deductible. Other plans carve out an individual “per-person” deductible for each member of the family.
But what’s the difference between an individual deductible and a family deductible?
The Individual Deductible Bucket
The individual deductible is a separate per-person deductible. It is a fixed amount of money each member of a family must pay before insurance will start paying for his or her services. Once this bucket is filled up for that specific family member, the health insurance will usually start picking up the tab for at least some of their medical services. However, they will not pay for the services of other family members just yet.
You can look to your summary of coverage and benefits to see if your plan has an individual deductible. We don’t use Mrs. Max OOP’s health insurance, but her insurance offers an individual deductible.
They go on to explain in detail why this matters:
As you can see, her plan has an individual deductible of $1,000. If we did use her plan, both myself and Mrs. Max OOP would have separate deductible buckets to fill up before insurance starts paying for our individual services.
If I were to fill up my individual bucket with $1,000, the insurance would start paying 80% of my services. I would just pay 20% until I met my max out-of-pocket. Even if Mrs. Max OOP hasn’t filled up any of her individual deductible bucket, I still only pay 20% for my services.
Our family deductible under this plan would be $2,000. If we had 4 members in our family and we all filled our individual deductible bucket up to $500, we meet the family deductible. The medical insurance then starts paying for medical services for all of us even though none of us met our individual deductible of $1,000.
- Max gets food poisoning in January: $500
- Mrs. Max OOP twists her ankle in February: $500
- Maxine falls ice skating in March: $500
- Maxwell Jr. hurts himself with a slingshot in April: $500
In theory, the family deductible could be met without any family members filling up their $1,000 individual buckets.
$500 Individual Deductible X 4 Family Members = $2,000 family deductible
None of us need to worry about our individual deductible for the rest of the year since the family deductible has been met.
The Family Deductible Bucket
The family deductible bucket is a fixed amount the entire family must pay before insurance starts paying expenses for everyone in the family. The family deductible is an accumulation of all the individual family members.
If you don’t have individual deductibles embedded in the plan, a single person in the family has to meet the entire family deductible before insurance starts paying.
Here is my employer plan, and this is the one we use for coverage.
Essentially, Mrs. Max OOP and I share the $3,300 family deductible. If one of us has a bad accident, we will have to pay the full $3,300 before insurance starts paying. We do no get our own individual deductibles.
The individual deductible puts in some protection for us from the aggregate family deductible. For example, if an individual family member has a bad accident or illness, they do not need to fill up the entire family deductible before insurance starts paying.
But on the flip side, we still have the family deductible cap should we ever need it. If we did use Mrs. Max OOP’s insurance, the entire family deductible risk would $2,000, regardless of my family size.
IRS Minimum for HDHP
Any employer health plan can have an individual deductible carve-out, but I always like to focus on high deductible health plans (HDHP). They often just have the family deductible with no individual deductible carve out.
The Internal Revenue Service (IRS) sets the minimum family deductible for a health insurance plan to qualify as a high deductible health plan. This is important because we need a high deductible health plan to qualify for a health savings account.
In 2020 and 2021, the minimum family deductible for a family plan to qualify as a high deductible plan is $2,800.
My plan’s family deductible is set at $3,300, which is $500 greater than the minimum set by the IRS. Thankfully, my employer puts $600 into my health savings account every single year. This could help me offset some of the cost of my deductible if I ever needed it.
Understanding how this works can help us plan for medical services. The individual deductible is where you want to start. In my case, I am on a high deductible health plan that doesn’t offer an individual deductible.
If we were on Mrs. Max OOP’s health insurance, my initial goal might be to save $1,000 in my health savings account. That would protect my budget from a single member of my family having an expensive medical spell. Additionally, a secondary goal might be to save up the entire family deductible of $2,000
For us though, we like to keep $3,300 available since we both carry the risk of the family deductible. We do not have individual deductible protection. This $3,300 would reserve my budget for an expensive healthcare year without impacting our regular standard of living. If my family were to grow, I wouldn’t need to save additional money since my deductible risk is capped at the $3,300 family deductible.
Finally, if you are an overachiever like Max, you could put away over $50,000 in your health savings account. This would cover my family deductible for the next 15 years.
How much is your individual/family deductible?