Insurance Terms Explained: Premiums, Deductibles and More

Insurance paperwork is full of words that can make your eyes glaze over. Yet those words decide what you pay and when. Once you know a handful of common terms, plan documents become much easier to read and compare. This guide explains the most important insurance terms in plain language, with simple examples. The examples use made-up round numbers just to show how things work. Your plan’s real numbers will be different.

Premium

Your premium is the amount you pay to keep your insurance active, usually every month. You pay it whether or not you use your coverage that month.

Example: If your health plan premium is $200 a month, you pay $200 each month to stay covered, even in a month when you never see a doctor.

Premiums apply to all kinds of insurance, including health, auto, renters, home and life.

Deductible

Your deductible is the amount you pay for covered services before your plan starts paying its share.

Example: Say your plan has a $1,000 deductible. You have a $600 bill early in the year. You pay the full $600. Later, you have a $700 bill. You pay $400 to finish meeting your deductible, and then your plan starts sharing the remaining $300.

A few things to know:

• Many health plans cover certain preventive care, like some checkups and screenings, before you meet the deductible.
• Deductibles usually reset each plan year.
• Auto and home insurance also have deductibles. There, it is the amount you pay toward a covered repair before the insurer pays the rest.

Copay

A copay (or copayment) is a fixed amount you pay for a specific service.

Example: Your plan might have a $25 copay for a regular doctor visit and a $10 copay for a generic prescription. You pay that set amount, and the plan covers the rest of the allowed cost.

Some plans charge copays before the deductible is met; others only after. Your plan documents will say which.

Coinsurance

Coinsurance is your share of costs shown as a percentage, usually after you meet your deductible.

Example: Your plan has 20% coinsurance. After your deductible, you get a covered service that costs $500. You pay 20%, which is $100. The plan pays the other 80%, which is $400.

The main difference: a copay is a set dollar amount, while coinsurance is a percentage of the cost.

Out-of-pocket maximum

The out-of-pocket maximum (sometimes called the out-of-pocket limit) is the most you would pay for covered, in-network care during a plan year. It includes your deductible, copays and coinsurance. It does not include your premiums.

Example: Your plan’s out-of-pocket maximum is $5,000. After your deductible, copays and coinsurance add up to $5,000 for the year, the plan pays 100% of covered in-network care for the rest of that plan year.

This number is helpful for planning, because it tells you the most you might spend on covered care in a hard year.

Network

A network is the group of doctors, hospitals, pharmacies and other providers that have agreed to work with your plan at set prices.

• In-network providers usually cost you less.
• Out-of-network providers may cost much more, or may not be covered at all except in emergencies.

Always check whether a provider is in your plan’s network before you make an appointment. You can usually search your plan’s online directory or call the number on your insurance card.

Common plan types

• HMO (Health Maintenance Organization): usually requires you to use in-network providers and get a referral to see a specialist.
• PPO (Preferred Provider Organization): gives more freedom to see out-of-network providers, usually for a higher cost.
• EPO (Exclusive Provider Organization): covers in-network care only, except emergencies, but often without referrals.

Other terms you will see

Allowed amount

The allowed amount is the most your plan will pay for a covered service. Your copay or coinsurance is based on this amount, not on the provider’s original price.

Referral

A referral is a written order from your primary doctor for you to see a specialist. Some plans require one.

Prior authorization

Prior authorization means your plan must agree in advance that a service, test or medicine is needed before it will help pay. Your doctor’s office usually handles the request, but it is good to ask whether it is needed.

Claim

A claim is a request for payment sent to your insurer, either by your provider or by you, after you get care or have a covered loss like a car accident.

Explanation of Benefits (EOB)

An Explanation of Benefits is a statement from your health plan showing what a provider charged, what the plan paid and what you may owe. It is not a bill. Compare it with any bill you receive to check for errors.

Summary of Benefits and Coverage (SBC)

Health plans must provide a Summary of Benefits and Coverage, a standard document that lays out costs and coverage in a consistent format. It is one of the easiest ways to compare plans side by side.

Putting it together

Here is how the terms work together in one simple year:

1. You pay your premium every month.
2. When you get care, you pay toward your deductible first, except for covered preventive care and services with copays.
3. After the deductible, you share costs through copays or coinsurance.
4. Once you hit your out-of-pocket maximum, the plan pays for covered in-network care for the rest of the year.

For more on choosing coverage, see our guide on health coverage basics. To check that your coverage still fits your needs, read reviewing your coverage each year.

The bottom line

A few key words, including premium, deductible, copay, coinsurance, out-of-pocket maximum and network, explain most of what you pay for insurance. When comparing plans, look at all of them together, not just the monthly premium. If a term is unclear, check the HealthCare.gov glossary or ask your plan directly.