An $8,000 hospital bill. You pay $2,800.
The story so far You fall off your bike on the way to work and break your wrist. The emergency room, the X-rays and the cast add up to a bill of $8,000. That's more than twice your whole emergency fund. But you have health insurance through the bike shop, which costs you $120 a month. Because of it, you pay $2,800 and the insurance company pays the other $5,200. This lesson shows how that split works, and how health, car and renters insurance keep one bad day from wiping out years of saving.
Insurance is a deal: you pay a small, known amount every month, and the company pays most of a big, unknown cost if something goes wrong.
An emergency fund handles hundreds or a few thousand dollars. Insurance handles the disasters that cost tens of thousands.
Know four numbers on every policy: the premium, the deductible, your share after that, and the most you can pay in a year.
Actuaries use math and data to set prices. Underwriters decide who to cover. Claims adjusters check what happened and what gets paid. Agents sell policies.
What you're looking at: a sketch of insurance as an umbrella. The red amounts are big bills from this lesson's examples (a hospital visit, a car repair, stolen things). Under the umbrella are the three kinds of insurance in this lesson: health, car and renters.
How insurance splits the bill.
Insurance only works because lots of people pay in and only a few have a disaster in any year. Here's how that turns into what you pay.
Pooling risk, and the premium
Thousands of people each pay the insurance company a little. Most of them don't get hurt that year, so their money pays for the few who do. This is called pooling risk. What you pay to stay covered is the premium. You pay it whether you use the insurance or not, like the price of a ticket.
- Your premium
- $120 a month, so 12 × $120 = $1,440 a year for health insurance.
Deductible, coinsurance and the yearly limit
When you get care, you pay the first part of the bills yourself. That amount is the deductible. After that, you split the rest with the insurer. Your share, as a percent, is coinsurance. Some visits have a flat copay instead, like $30 for a doctor visit. And every plan has an out-of-pocket maximum: once you've paid that much in a year, the insurer pays 100% of covered care. Checkups and other preventive care are usually free.
- Your plan
- Deductible $1,500, then 20% coinsurance, out-of-pocket maximum $5,000.
- The $8,000 wrist
- You pay the $1,500 deductible. That leaves $8,000 − $1,500 = $6,500. Your 20%: $6,500 × 0.20 = $1,300.
- Your total
- $1,500 + $1,300 = $2,800. The insurer pays $8,000 − $2,800 = $5,200.
Choosing a health plan
Jobs often offer two kinds of plans. A low-premium plan costs less each month but has a higher deductible. A high-premium plan costs more each month but you pay less when you get care. The best choice depends on how much care you expect. To compare, add the year's premiums to what you'd pay for care. Under 26? You can also stay on a parent's plan.
What you're looking at: two made-up health plans facing the same yearly medical bills. Plan A: $120 a month, $1,500 deductible, 20% coinsurance, $5,000 maximum. Plan B: $250 a month, $500 deductible, 10% coinsurance, $2,500 maximum. Each bar is your full cost for the year: premiums (gray) plus what you pay for care (orange).
- A healthy year, $300 of care
- Plan A: $1,440 + $300 = $1,740. Plan B: $3,000 + $300 = $3,300.
- The $8,000 wrist
- Plan A: $1,440 + $2,800 = $4,240. Plan B: $3,000 + $1,250 = $4,250. Almost a tie.
Car insurance
Almost every state requires liability coverage, which pays for damage and injuries you cause to other people. It doesn't fix your own car. For that you add collision (your car in a crash) and comprehensive (theft, hail, fire, hitting a deer). A lender usually requires both while you have a car loan, like the one from Lesson 4.3.
- You back into a pole
- Repair: $2,300. Collision deductible: $500. You pay $500; the insurer pays $2,300 − $500 = $1,800.
- Liability only
- The same crash with only liability: you pay all $2,300.
Renters insurance
If you rent, your landlord's insurance covers the building, not your things. Renters insurance replaces your belongings after theft, fire or water damage, and covers you if a guest gets hurt. It's often about $15 to $20 a month.
- A break-in
- Laptop $1,000 + bike $600 + TV $400 = $2,000 stolen.
- With a $250 deductible
- You pay $250; insurance pays $2,000 − $250 = $1,750. A year of coverage at $15 a month is 12 × $15 = $180.
Your deductible and your emergency fund
A higher deductible means a lower premium, because you're taking on more of the small costs. That's smart only if your emergency fund can pay the deductible on a bad day. Insurance covers the disasters; your emergency fund covers the deductibles.
- Your fund
- $3,600 (from Lesson 3.2) easily covers a $500 car deductible, and even the $2,800 wrist.
Two minutes. Just listen.
Tap any line to jump to it.
Who pays?
Six claims. Each one shows the coverage and what happened. Figure out how much you pay, then tap your answer. One try each.
What you're looking at: made-up insurance claims. Each lists the coverage and what happened, then asks what you pay out of your own pocket.
The logic, step by step.
Four steps work out any health bill. Car and renters claims use only step 1.
Step 1: The deductible comes first
- An $800 visit
- $800 is under the $1,500 deductible, so you pay $800.
Step 2: Split what's left
- The wrist
- ($8,000 − $1,500) × 0.20 = $1,300.
Step 3: Add, then check the maximum
- $8,000 bill
- $1,500 + $1,300 = $2,800, under $5,000.
- $40,000 surgery
- $1,500 + ($38,500 × 0.20) = $9,200, but the maximum is $5,000, so you pay $5,000.
Step 4: Compare plans by the full year
- Plan A, $8,000 of care
- 12 × $120 + $2,800 = $4,240.
Worked example: the worst case
- The question. What's the most a terrible year could cost you on Plan A?
- Premiums. 12 × $120 = $1,440, paid no matter what.
- Care. No matter how big the bills get, the most you pay is the $5,000 maximum.
- Worst case. $1,440 + $5,000 = $6,440 for the year, even for a $40,000 or $400,000 surgery.
- The point. Insurance turns an unknown, possibly huge cost into a known one you can plan for.
Penguins share the cold.
In the Antarctic winter, emperor penguins huddle by the thousands. The ones on the outside take the wind; the ones inside stay warm. The huddle slowly turns, so every penguin takes a short turn on the cold edge. Alone, a penguin could freeze. Together, each one pays a little and all of them survive.
What you're looking at: an illustration, not data. Penguins huddled against the wind, with an arrow showing how the huddle slowly turns so each one takes a turn outside.
Why this sticks. Your premium is your short turn on the cold edge. You pay a little every month so that when the storm hits you, the whole group carries you through.
The page you'd copy down.
- Pooling risk: many pay a little so the few with bad luck are covered. Premium = what you pay to stay covered.
- Deductible first, then coinsurance (your %), up to the out-of-pocket maximum. Then the insurer pays 100%. Copays are flat fees.
- You pay = deductible + coinsurance × (bill − deductible), capped at the max. $8,000 wrist → $2,800.
- Compare plans by the year: 12 × premium + care. Low premium wins in healthy years; high premium can win in big years.
- Car: liability (others, required), collision (your car, crash), comprehensive (theft, hail, deer).
- Renters: your things + liability, about $15 to $20 a month. The landlord's policy doesn't cover your stuff.
- Pick deductibles your emergency fund can pay.
Fill in the blanks
Grab a friend or a study group.
The penguin game
Everyone puts in $5 of play money. Roll a die for each person; a 1 means a "disaster" that costs $20. Does the pool cover everyone? That's pooling risk.
Plan A or Plan B?
Each person makes up a year of doctor visits and bills. Use the slider here to decide which health plan would have been cheaper for them.
Ask about a claim
Ask a family member if they ever used insurance after a crash, a break-in or a hospital visit. What was the deductible? Did they know it before?
Just you and your money.
These stay on this device. Nobody else sees them.
Exam-style questions.
Written the way a college exam would ask them. Each right answer on the first try is worth 10 xp.
On the job: you're the insurance agent
A customer, Marcus, is 22 and has to choose a health plan at his new job. Here are his two choices:
- Plan A: $120 a month, $1,500 deductible, then 20%, maximum $5,000 a year.
- Plan B: $250 a month, $500 deductible, then 10%, maximum $2,500 a year.
- Most years, Marcus only needs about $300 of care.
- He's worried about a bad year with a $10,000 surgery.
Your task: tell Marcus what each plan costs for the whole year in a normal year and in the surgery year, and which you'd suggest.
See a model answer
Premiums: Plan A is 12 × $120 = $1,440 a year. Plan B is 12 × $250 = $3,000.
Normal year, $300 of care: both plans: he pays the $300 (it's under each deductible). Plan A: $1,440 + $300 = $1,740. Plan B: $3,000 + $300 = $3,300.
Surgery year, $10,000: Plan A: $1,500 + ($8,500 × 0.20) = $3,200, total $4,640. Plan B: $500 + ($9,500 × 0.10) = $1,450, total $4,450.
Suggestion: Plan A. It saves $1,560 in a normal year and costs only $190 more in the surgery year. He should keep enough in his emergency fund to cover the $1,500 deductible.
From building money to protecting it.
What you're looking at: a map of where this lesson fits in the course. Read it left to right: the lesson that comes before, this lesson in the middle, and the lessons it connects to.
- Before · Unit 4Car, student and payday loans
- You are hereInsurance: health, car and renters
- Next · Unit 6Scams and identity theft
- Back · Unit 3Build an emergency fund
- Later · Unit 7Buying a car