Insurance Basics Lab
Explore how insurance shares the cost of an unexpected expense. Set a policy and a claim, then watch how the deductible, coinsurance, and out-of-pocket maximum decide who pays what. Compare a low-deductible plan against a high-deductible plan over a full year and test your understanding of the key terms.
Choose a Starting Plan
Policy and Claim
Set your policy terms and the cost of a single incident, such as a car repair or a medical bill. The breakdown below shows who pays what.
Cost Breakdown
Claim cost
$4,000
You pay
$1,600
Insurance pays
$2,400
You pay the $1,000 deductible, then 20% coinsurance on the $3,000 above it ($600). Your total cost is $1,600, still under your out-of-pocket maximum of $6,000.
Controls
How to use this lab
Change the claim cost and policy terms, record several scenarios in the data table, then compare a low-deductible plan against a high-deductible plan over a year.
Compare Two Plans Over a Year
Pick a year and see which plan costs less in total. Total cost is twelve monthly premiums plus what you pay out of pocket on each claim.
Low Deductible Plan
- Premium: $450 per month
- Deductible: $1,000
- Coinsurance: 20%
- Out-of-pocket max: $6,000
Premiums: $5,400
Out-of-pocket on claims: $1,600
Total for the year: $7,000
High Deductible Plan
Cheaper- Premium: $220 per month
- Deductible: $5,000
- Coinsurance: 20%
- Out-of-pocket max: $8,000
Premiums: $2,640
Out-of-pocket on claims: $4,000
Total for the year: $6,640
For this year, the High Deductible Plan costs less. Notice how the low-deductible plan wins when claims are large, while the high-deductible plan wins in a low-claim year.
Match the Term to its Meaning
Data Table
(0 rows)| # | Claim Cost ($) | Deductible ($) | Coinsurance (%) | OOP Max ($) | You Pay ($) | Insurance Pays ($) |
|---|
Reference Guide
The Four Cost Terms
Every insurance policy uses a few key terms to describe how cost is shared between you and the insurer.
- Premium. The fixed amount you pay every month to keep coverage active, whether or not you make a claim.
- Deductible. The amount you pay yourself before insurance starts paying for covered costs.
- Coinsurance. The percentage of a covered cost you keep paying after the deductible is met.
- Out-of-pocket maximum. The most you can pay in a year. Once you reach it, insurance covers the rest.
How a Claim Is Split
When you file a claim, your share is calculated in order. First you pay the deductible, then a share of what is left.
- Step 1. If the claim is below the deductible, you pay all of it.
- Step 2. Above the deductible, you pay the coinsurance percentage of the remaining amount.
- Step 3. Your total payment stops once it reaches the out-of-pocket maximum.
Example. A 4,000 dollar claim with a 1,000 dollar deductible and 20 percent coinsurance costs you 1,000 plus 20 percent of 3,000, which is 600, for a total of 1,600. Insurance pays the other 2,400.
Risk Pooling
Insurance works through risk pooling. Many people each pay a premium into a shared fund. In any given year only a few of them will have a large loss.
The premiums of the many cover the claims of the few. No one knows in advance who will need a payout, so spreading the risk across a large group keeps each person's cost predictable and affordable.
This is why a single large claim, like a 40,000 dollar hospital bill, can be paid even though that person paid far less than 40,000 dollars in premiums. The math only works when the pool is large and most members stay healthy or claim-free.
Choosing Between Plans
A low-deductible plan charges a higher monthly premium but pays more of each claim. A high-deductible plan charges a lower premium but leaves more cost on you when a claim happens.
To compare them, add the yearly premiums to the out-of-pocket cost on your expected claims. The plan with the lower total wins for that scenario.
A high-deductible plan often wins in a low-claim year because you save on premiums. A low-deductible plan often wins when a big claim is likely, because it caps your exposure sooner. The best choice depends on how much risk you expect.
