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Course: Financial Literacy > Unit 6
Lesson 2: Insurance basics and terminologyInsurance terminology
Insurance terminology is the special words and phrases used to describe how insurance works and the different parts of an insurance plan. It's important to understand these terms so you can choose the right insurance for your needs and know what to expect if you ever need to use it. Created by Sal Khan.
Want to join the conversation?
- What's the difference between copay and deductible in effect?(4 votes)
- A copay applies to every visit you make for some sort of service. A copay is a set dollar amount, per visit. Even when you reach the point where the insurance company is covering all of your expenses, you must make a copay for each visit.
The decuctable applies to when insurance begins to pay ANY of your medical expenses. So, if you can afford to pay, say, $1,000 annually for medical services out of pocket, That will be your deductable. Plan on paying that much before your insurance begins to pay anything at all.
Consider the deductable to be similar to a "Buy one, get one free" offer at the grocery store. You can't get the free one until you pay for the "buy one".(10 votes)
- If the deductible is $5000 and you pay let's say $3000 for medicare. Does your deductible go back to $5000 at some point?(1 vote)
- My guess would be it resets every year.(4 votes)
Video transcript
- Now let's talk about some of the words you're likely to hear if
you're dealing with insurance. So the first one is a premium
or an insurance premium, and that's really just what you're paying in order to get the insurance. So if you pay, let's say $200
a month for health insurance, that $200 a month is your premium. Now the other number or the other word you'll
hear a lot is deductible. Now this is an amount of money that you're going to have to pay and then only when you
get above that amount, then the insurance kicks in. So let's say your health
insurance has a $5,000 deductible, and let's say you have to
go through some type of, and let's say it's the
beginning of the year. Usually it's based on a calendar year, and you have to get some
type of healthcare done, and it costs $2,000. Well, you're going to pay
that $2,000 out of pocket. You're going to pay that yourself, because you haven't
hit the deductible yet. Let's say you have to
go in that same year, do another thing that costs $3,000. Once again, you're going
to pay that out of pocket, which is just another way of saying you're gonna pay that yourself. It's not gonna come through insurance, but so far you have paid $5,000, $2,000 for the first thing,
$3,000 for the second thing. And now if you were to go and let's say have to get a
another $5,000 procedure done in that same year, now the insurance will kick in because you used up your deductible. So if there's a $5,000 deductible, and you'll see it on health insurance, you'll see it on car insurance. You pay that first amount, and then the insurance kicks
in above and beyond that. Now you might say, "Well, why would I ever
have or want a deductible?" Well, usually the higher the deductible, the lower your premium. You usually have to pay less for insurance that has a high deductible. From an insurance company's point of view, they say, "Okay, the deductible
is kind of an incentive for you to not necessarily
use this service, you know, get your car
in a wreck all the time, or necessarily have to go
to healthcare all the time." And from your point of view, you might say, "Hey, you know what? I really, I'm willing
to take a deductible, because at the end of the day, insurance is really for if the bills become really,
really, really large." So just another example. Let's say your car insurance
has a $5,000 deductible. Well, I'll use a different number. Let's say your car insurance
has a $1,000 deductible, and then you were to get into
some type of a fender bender, and the mechanic says, "It's gonna cost $3,000
to repair this car." Well, then you would file a claim with your insurance company, that's saying, "Hey, something happened. I'm gonna need to get
paid out a little bit, 'cause I've been paying
this premium all this time." And the insurance company
says, "Okay, we'll pay it, but you have a $1,000 deductible. So you pay that $1,000 out of pocket, and then we are going to
pay the remaining $2,000 for that total of $3,000 for the repair." Now, the last thing I'll talk about is, there's oftentimes some type of limit to the insurance policy, or sometimes they'll
call it a policy limit, and that's this idea that the insurance might cover
you up to a certain amount. So let's say you have liability insurance. That's really just insurance in case someone sues you
for doing something wrong. Usually that has a limit to it, so it might have a $100,000 limit or $500,000, whatever it means. And what that means is,
let's say someone sues you, and if the court decides that you have to pay them $100,000, let's say your limit is $100,000, then the insurance company
will pay the $100,000. But let's say the court decides that you owe that other
person who just sued you for some type of liability. Let's say you have to owe them $125,000. Well, then the insurance company
will go up to the 100,000 and then you're gonna have to pay that other $25,000 out of pocket. One last word now that
I really think about, is the notion of a copay, and you're gonna see a copay a lot when you're thinking
about health insurance, whether it's health insurance
or dental insurance. And that's this idea that let's say you go for
your regular checkups, either your dental checkups
or your healthcare checkups. You might see copays at other places. The actual cost of that
checkup might be three or $400, and the insurance company
says, "You know what? We will cover some of this, what we'll call preventative care," which is care that, you know, checkups, make sure you don't get sicker. And it makes sense for
insurance companies to do that, because the sicker you get, the more expensive your
health bills could get. But they say, "There is some amount that
you have to pay alongside us," so that's what the copay is. So for example, with my health insurance, I go, I get a checkup, I
have to pay a $20 copay. It might cost a few hundred dollars of what the insurance company's paying, but I pay $20 alongside that. So hopefully you're a little
bit more knowledgeable about some of the words of insurance. I obviously, I didn't
know all of these words until, honestly, I had left college and I had to get insurance myself. So if you already know these, and especially if you haven't got, you know, if you're younger, you're very much ahead of the curve.