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Buying insurance coverage helps keep you protected from the full financial fallout of an accident or injury. But even with insurance, you’ll probably still be responsible for some costs when you file a claim.

An insurance deductible is the amount of money the insured party is responsible for at the time of loss or damage: it’s the cost you have to pay before the insurance company pays out its share.

Here’s what you need to know about the different types of insurance deductibles and other insurance-related costs you may face.

What Is a Deductible?

When you buy insurance, you’ll encounter several different costs depending on the type of coverage you’re purchasing. These may include monthly premiums, copays, out-of-pocket maximums, and possibly others.

The vast majority of insurance policies, whether they’re auto, health, or homeowners, carry a deductible. So what is a deductible, and how does it work?

The deductible is a sum of money you, as the insured party, are expected to pay toward a loss. Another way to think about it: It’s the amount the insurance company deducts from the total claim and asks you to pay.

For instance, say you get into a car accident in which you sustain $8,000 worth of damage and you have a $1,000 deductible. When you file your claim, you’ll pay $1,000 toward repairs and the insurance company will cover the remaining $7,000 (or up to whatever limits are laid out in your insurance contract).

Your deductible can be a fixed dollar amount or a percentage, depending on your individual plan and the kind of insurance policy you’re talking about. Homeowners insurance, for instance, is commonly offered with deductibles calculated as a percentage of the property’s total insured value.

It’s important to understand that your deductible is separate from your premium, which is the amount of money you pay each month in order to keep your insurance policy active.

Also remember that you may also be responsible for other insurance-related expenses, like copays or coinsurance, so always read the fine print carefully.


💡 Quick Tip: If you have a mortgage, a homeowners policy may be required by your lender. Surprisingly, unlike auto insurance, there is no legal mandate to carry insurance on your home.

Copay vs Deductible

With certain types of insurance — primarily health insurance products — you may be required to pay a copay each time you go to the doctor’s office or receive a covered service. This copay is separate from your deductible, and, generally, your copay doesn’t count toward your deductible amount.

As with other types of insurance, the health insurance deductible must be paid by the insured person before the insurance company begins its coverage. However, individual health plans may cover certain services, such as regular check-ups, even before the deductible is paid in full.

Here’s an example: Say you twist your ankle and visit your doctor, who orders an MRI. If your copay is $25, you’ll pay $25 at the office before or after you see your physician. If the total cost of the doctor’s care and imaging services is $1,000 and you have a $500 deductible, you may still be responsible for the full $500. Any copays you’ve paid along the way won’t be subtracted from your deductible.

Some plans may carry a coinsurance cost rather than a copay. The two are similar, but not identical. Coinsurance is an amount you pay when you receive a medical service, separate from your deductible. Unlike copays, which are charged at a fixed dollar amount, coinsurance is calculated as a percentage of the total cost of the service. Your plan might even include both copays and coinsurance.

All insurance policies are different, and your individual costs and experience may vary depending on the services you’ve received and the specific coverage you have. You can consult your insurance paperwork or contact your insurer for full details on what’s covered in your plan.

Out-of-Pocket Maximums

Health insurance policies in particular are subject to federally mandated out-of-pocket maximums. This is the highest total dollar amount you’ll have to pay toward covered healthcare over the course of a single year, including both deductibles and copays.

The out-of-pocket maximum does not include the amount you pay toward your monthly premium, however. Nor does it include out-of-network services or services that your plan expressly does not cover.

For 2023, the out-of-pocket maximum for a Marketplace plan can’t be more than $9,100 for an individual or $18,200 for a family. In 2024, that limit rises to $9,450 for an individual or $18,900 for a family. (The maximum is allowed to be lower, however, so consult your plan paperwork for full details.)

Do You Want a High or Low Deductible?

When shopping for insurance coverage, you’ll likely have a range of options to consider, including varying deductible costs. And when it comes to figuring out whether you want a high or low deductible, the answer is: It depends.

Generally speaking, the lower your deductible, the higher your premium will be and vice versa. This makes sense when you think about it. If you have a low deductible, the insurer will have to pay out a higher amount when you incur a loss. So in exchange for the promise of covering most of the costs when a claim is filed, the company expects you to pay more up front in the form of a higher premium.

While choosing a higher deductible can help you save money over time since your monthly premiums will be lower, it also means you’re assuming more risk. If something happens and costs are incurred, you’ll be responsible for a larger share of those expenses.

On the other hand, choosing a lower deductible means you’ll likely pay a higher premium each month. But you’ll also have less to worry about if you do need to file a claim, since the insurance company will cover more of the costs (assuming that all the damages and expenses are covered under your policy).

As with so many other financial matters, what’s right for you comes down to a number of factors, including your risk tolerance, budget, and even your lifestyle. If you participate in extreme sports, for instance, and are at risk for catastrophic injuries, you might want to pick a health insurance policy with a lower deductible and higher premiums.

Recommended: How Much Is Homeowners Insurance?

Zero-Deductible Insurance: Is It a Thing?

You may see ads for zero-deductible insurance policies and wonder if they’re too good to be true. While zero-deductible insurance policies do exist, they usually carry higher premiums than policies that do carry deductibles, and you may also be responsible for a one-time no-deductible fee or waiver.

Furthermore, some insurance coverages are required by state law to carry a minimum deductible, particularly when it comes to auto insurance.

Before you sign up for any kind of insurance coverage, be sure to read the contract thoroughly to ensure you understand what costs you’re responsible for.

Recommended: What Does Auto Insurance Cover?

Types of Deductibles

There are many different types of insurance policies with deductibles on the market. Common ones include:

•   Health insurance deductibles

•   Auto insurance deductibles

•   Homeowners insurance deductibles

•   Renters insurance deductibles

•   Life insurance deductibles

The deductible amount varies by type of insurance, company, and plan, among other factors.


💡 Quick Tip: Online insurance tools allow you to personalize your coverage for homeowners, renters, auto, and life insurance — all with zero paperwork.

The Takeaway

Purchasing insurance is an important — and sometimes legally mandated — step toward protecting yourself from the high costs of personal accidents, property damages, and medical bills. But most policies involve set costs, including deductibles. This is the portion of the claim the insured party is responsible for paying.

Whether you’re comparison shopping or switching from your current plan, it’s important to understand what your deductible will be. Having a full picture of all the costs involved can help you find coverage that fits your life and finances.

When the unexpected happens, it’s good to know you have a plan to protect your loved ones and your finances. SoFi has teamed up with some of the best insurance companies in the industry to provide members with fast, easy, and reliable insurance.

Insurance not available in all states.
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SoFi is compensated by Gabi for each customer who completes an application through the SoFi-Gabi partnership.

Coverage and pricing is subject to eligibility and underwriting criteria.
Ladder Insurance Services, LLC (CA license # OK22568; AR license # 3000140372) distributes term life insurance products issued by multiple insurers- for further details see ladderlife.com. All insurance products are governed by the terms set forth in the applicable insurance policy. Each insurer has financial responsibility for its own products.
Ladder, SoFi and SoFi Agency are separate, independent entities and are not responsible for the financial condition, business, or legal obligations of the other, SoFi Technologies, Inc. (SoFi) and SoFi Insurance Agency, LLC (SoFi Agency) do not issue, underwrite insurance or pay claims under LadderlifeTM policies. SoFi is compensated by Ladder for each issued term life policy.
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All services from Ladder Insurance Services, LLC are their own. Once you reach Ladder, SoFi is not involved and has no control over the products or services involved. The Ladder service is limited to documents and does not provide legal advice. Individual circumstances are unique and using documents provided is not a substitute for obtaining legal advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SOPT0923002

A preferred provider organization (PPO) is a type of health care plan that offers lower out-of-pocket costs to members who use doctors and other providers who are part of the plan’s network.

These preferred providers have signed onto the network at a lower negotiated rate than they might charge outside of the network.

PPOs also offer members the flexibility to see providers outside of the plan’s network, although they will most likely pay more in out-of-pocket costs to do so.

To learn more about PPOs, and how this type of plan compares to other health insurance options, read on.

How Does PPO Insurance Work?

When you join a PPO health plan, you’re joining a managed care network that includes primary care doctors, specialists, hospitals, labs, and other healthcare professionals. PPO networks tend to be large and geographically diverse.

If you see a preferred provider, you will likely pay a copay, or you might be responsible for a coinsurance payment (after you meet the plan’s deductible).

While you are free to see any health care provider whether or not they are in the PPO network, if you see a provider outside of the network, you may pay significantly more in out-of-pocket costs. In return for flexibility, large networks, and low in-network cost sharing, PPO plans typically charge higher premiums than many other types of plans.

PPOs are a common, and often a popular, choice for employer-sponsored health insurance.

Recommended: Common Health Insurance Terms & Definitions

What Are the Costs of Going Out of the PPO’s Network?

If you see a provider who is not part of the plan’s network, you will likely be expected to bear more of the cost. PPOs typically use what’s called a “usual, customary and reasonable” (UCR) fee schedule for out-of-network services.

Insurers calculate UCR fees based on what doctors in the area are charging for the same service you were provided.

If your doctor charges more than what your insurance company determines to be usual, customary, and reasonable, you most likely will be charged for the difference between the amount charged for the service and the amount covered by your insurer.

Depending on where you live and the service you received, this difference could be significant. It may also come as a surprise to policyholders who assume their medical costs will be covered and don’t fully understand the distinction between in-network and out-of-network providers.

A good way to avoid surprise charges with a PPO (or any health plan) is to talk to your provider and your insurer before you receive treatment about the total cost and what will be covered.


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How PPOs Compare to Other Types of Health Care Plans

PPO plans are most often compared with health maintenance organizations (HMOs), another common type of managed care health plan.

HMOs typically offer lower premiums and out-of-pocket costs than PPOs in exchange for less flexibility.

Unlike a PPO, HMO members typically must choose a primary care physician from the plan’s network of providers. Care from providers out of the HMO network is generally not covered, except in the case of an emergency.

Also unlike a PPO, an HMO’s network of providers is usually confined to a specific local geographic area.

Another key difference between these two types of plans: HMO members typically must first see their primary care doctor to get a referral to a specialist. With PPOs, referrals are not usually required.

PPOs are also often compared to point of service (POS) plans.

POS plans are generally a cross between an HMO and a PPO. As with a PPO, POS members generally pay less for care from network providers, but may also go out of network if they desire (and potentially pay more).

Like an HMO, POS plans require a referral from your primary care doctor to see a specialist.

PPOs (as well as HMOs and POS plans) are very different from high deductible health plans, or HDHPs.

HDHPs charge a high deductible (what you would have to pay for health care costs before insurance coverage kicks in).

This means that you would need to pay for all of your doctor visits and other medical services out of pocket until you meet this high deductible. In return for higher deductibles, these plans usually charge lower premiums than other insurance plans.

You can combine a HDHP with a tax-advantaged health savings account (HSA). Money saved in an HSA can be used to pay for qualified medical expenses.

HDHPs are generally best for relatively healthy people who don’t see doctors frequently or anticipate high medical costs for the coming year.

Recommended: Beginner’s Guide to Health Insurance

What Are the Pros and Cons of PPO Insurance?

As with all health insurance options, PPOs have both advantages and disadvantages. Here are a few to consider.

Advantages of PPOs

•   Flexibility. PPO members typically do not have to see a primary care physician for referrals to other health care providers, and they may see any doctor they choose (though they may pay more for out-of-network providers).

•   Lower costs for in-network care. Out-of-pocket costs, such as copays and coinsurance, for care from in-network providers can be lower than some other types of plans.

•   Large provider networks. PPOs usually include a large number of doctors, specialists, hospitals, labs, and other providers in their networks, spanning across cities and states. As a result, network coverage while traveling or for college student dependents can be easier to access than with more restricted plans.

Disadvantages of PPOs

•   High premiums. In return for flexibility, PPO members can expect to pay higher monthly premiums than they may find with other types of plans.

•   High out-of-pocket costs for out-of-network care. Depending on where you live, the treatment you receive, and how your insurer calculates “usual, customary, and reasonable” fees, you may find you are responsible for a large portion of the bill when you receive care outside of the PPOs network.

•   Might be more insurance than you need. If you rarely see doctors and wouldn’t mind potentially switching doctors, you may be able to save money by going with an HMO or a HDHP.

💡 Quick Tip: Income, expenses, and life circumstances can change. Consider reviewing your budget a few times a year and making any adjustments if needed.

The Takeaway

PPOs are a popular type of health plan because of the flexibility, ease of use, and wide range of provider choices they offer. PPO networks tend to be large and varied enough to include a patient’s existing doctors. If not, members still have the option of going out-of-network and receiving at least some coverage from a PPO. PPO members pay for this flexibility, however.

PPOs typically come with higher premiums, along with extra costs associated with out-of-network care. That can be prohibitive for many consumers.

Your employer’s benefits department or an experienced insurance agent or broker can help you compare PPOs to other types of health care plans and determine which choice is right for your health care needs and your budget.

Before choosing a plan, it can also be helpful to track your spending for a few months to see how much you are currently spending on medical care. This can help you ballpark costs for the coming year and make it easier to compare plans.

Take control of your finances with SoFi. With our financial insights and credit score monitoring tools, you can view all of your accounts in one convenient dashboard. From there, you can see your various balances, spending breakdowns, and credit score. Plus you can easily set up budgets and discover valuable financial insights — all at no cost.

SoFi Relay offers users the ability to connect both SoFi accounts and external accounts using Plaid, Inc.’s service. When you use the service to connect an account, you authorize SoFi to obtain account information from any external accounts as set forth in SoFi’s Terms of Use. Based on your consent SoFi will also automatically provide some financial data received from the credit bureau for your visibility, without the need of you connecting additional accounts. SoFi assumes no responsibility for the timeliness, accuracy, deletion, non-delivery or failure to store any user data, loss of user data, communications, or personalization settings. You shall confirm the accuracy of Plaid data through sources independent of SoFi. The credit score is a VantageScore® based on TransUnion® (the “Processing Agent”) data.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SORL0923001

If you’ve ever heard the expression, “A dollar today is worth more than a dollar tomorrow,” then you know the basic definition of the time value of money. Essentially, having $1,000 today is more valuable than having $1,000 a year from now because of the potential for growth over that time period.

Other factors can also influence the time value of money, or TVM. For example, inflation naturally increases over time, and that can lower the purchasing power of future dollars. In short: Money you can put to work now is usually worth more than the same amount down the line.

Investors and business owners use TVM as a way to compare values of certain sums of money over different time periods.

Recommended: How to Build an Investment Portfolio for Beginners

What Is the Time Value of Money?

The time value of money is the relationship between a dollar at one point in time and the value of that same dollar at another point in time. For example, $50 today likely won’t have the same value as $50 a year from now, just as $1 million now is not the same as $1 million 20 years ago (when a million dollars bought more than it does now).

You don’t need to know the formula for time value of money to understand the basic forces at play here. First, there is the potential for a present sum of money to earn a profit (if you invest it) or to gain interest (if you save it or buy debt instruments like bonds) over time.

Inflation is also an important consideration when calculating the time value of money. As goods get more expensive, each dollar will purchase less than it did the year before. For example, the historic rate of inflation is about 2% per year. If you consider how much $10,000 can buy today, it would buy roughly 2% less in a year — about $9,800 worth of goods.

So the time value of money is a framework for comparing lump sums of money and/or payments across different time periods. Dollars can be future, present, or past — almost like different currencies.

The definition of the time value of money may seem like a purely academic concept, but has many real-world applications. Time value of money is used in personal finance, real estate, and investing decisions.


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How Does Time Value Work?

The time value of money can look at both the present and future value of money and the value of cash flows. It allows both institutional and retail investors to compare payments or sums of money over different time frames.

Within a business context, calculating the time value of money using a TVM formula is important because it can help with decision making, e.g. about acquiring a new business or developing a new product. If you put $X amount of cash into a new line of business, what is the future value of that amount? And would the new investment equal or exceed it — or not (in which case it might not be a good use of your capital)?

To determine the value of money over periods of time, investors can use a formula that takes into account the present value and future value of a specific amount, and how it will change over time.

How to Calculate TVM for a Future Value

Quite often, investors are called upon to evaluate the future value (FV) of a present dollar amount. That formula is:

Where:

•   PV – Present value of money

•   FV – Future value of money

•   i – interest rate or other amount that can be earned on the money

•   t – number of years being considered

•   n – number of compounding periods of interest per year

Let’s say you have $2,000 that’s earning 5% per year in interest payments. You could keep your money where it is, or you could consider another investment opportunity. In order to decide, it helps to know what the future value of your cash will be, given current parameters.

In this case, the calculation would look like this, employing the FV formula above:

This calculation tells you that your money is likely to be worth $2,205 in two years, assuming nothing changes. This could help you gauge whether the new opportunity would be likely to deliver a higher or a lower return.

How to Calculate TVM for a Present Value

It’s also possible to consider a future sum that’s being offered, and what that translates to in present dollars. Let’s say you could earn $2,000 now or be given $2,200 in a year. You’d need to calculate what the present value of $2,200 is.

To determine whether it makes sense to wait one year for an extra $200, here’s how to calculate the present value of that future amount, assuming you could earn 5% in the coming year.

In this case, the present value of the $2,200 being offered in one year is higher than taking just $2,000 now ($2,095). Which suggests that waiting to take the $2,200 payment might be a better move.

If there are multiple times per year when interest compounds, the result can be quite different. If interest compounds daily, monthly, quarterly or yearly can have a big effect on the TMV calculation (see below for more on compounding).

Why Is the Time Value of Money Important?

Time changes the value of money. Being able to calculate the present vs. the future value of money enables you to make better choices about how to invest and spend your money.

Therefore, TVM is inherently important in both an investing and a business context because it can help you gauge the value of different opportunities, and assess which makes the most sense financially.

Time Value of Money and Compound Returns

For the individual investor, there is perhaps no way in which the time value of money is more important than with the potential for earning compound returns.

To earn compound returns is to earn a rate of return on both the initial principal invested and all subsequent profits. As profits grow, so does the potential to earn more — and all that this exponential growth requires is that you stay invested.

The key to harnessing the raw power of compound returns is to spend as much time invested as possible — another example of the time value of money. Each year of positive returns is fuel for greater future returns.

This can be hard for investors to wrap their heads around because the results can take decades to reveal themselves. To understand compound returns, and the phenomenon of compounding in general, it helps to start with a comparison of simple and compound interest.


💡 Quick Tip: When you’re actively investing in stocks, it’s important to ask what types of fees you might have to pay. For example, brokers may charge a flat fee for trading stocks, or require some commission for every trade. Taking the time to manage investment costs can be beneficial over the long term.

Comparing Simple Interest to Compound Interest

With simple returns, a rate of return is produced on the principal investment in each period. An example is a basic Treasury note or bond that pays a 5% rate of return on $1,000 each year for five years. Each year the bondholder receives a $50 payment ($1,000 x 5%). The amount is not reinvested (i.e. there is no compounding), and at the end of five years the investor gets back the principal, and makes a profit of $250 (5 x $50) for a total of $1,250.

The time value of money has a bigger impact when you have a savings bond that pays 5% that compounds semi-annually. At the end of the five years, the investor’s initial $1,000 investment has grown to approximately $1,276. This is a total profit of $276, compared to simple interest’s $250. While this might not seem like much, this gap will continue to grow as compound return growth increases.

Likewise, the more frequent the compounding is, the greater the potential for growth would be. Thus compounding is an important factor in the time value of money as well.

Factors Affecting Compound Returns

There are four variables at play when calculating compound returns: the rate of return, the principal invested, the duration, and the frequency of compounding (e.g. monthly, quarterly, annually).

Check out a compound returns calculator for a better understanding of how these variables interplay. What you’ll find is that all factors can have a powerful impact on the time value of money.

Investors should also consider inflation. Inflation, or rising prices over time, also has a compounding effect. Investors can consider using a time value of money formula for inflation, and think about ways to hedge against inflation.

How Does Inflation Impact the Time Value of Money?

Inflation is another reason that money is typically worth more in the present than in the future. As time goes on, inflation erodes the purchasing power of money. So the same amount of money can’t buy as many goods in the future as it can today.

This is sometimes called inflation risk, and it refers to the need for investors to factor in the potential gains of an investment over time vs the impact of inflation, so they can protect their money. Invested money that gains more than the rate of inflation won’t lose value over time.

Recommended: Is Inflation a Good or Bad Thing for Consumers?

Working With the Time Value of Money

Investors use the time value of money to understand the worth of money in relation to time, which helps them understand the value of their funds in the present and the future and how to invest them.

As noted above, factors such as interest rates, inflation, and risk all affect investments over time, so having formulas to help make decisions is a useful tool. Here are some other factors to consider.

Discount Rate

To decide whether the future cash flows from an investment will be worth more than the money required to fund the project now, in the present, you can use something called the discount rate. The discount rate is the rate of interest used to assess the present value (PV) of those future dollars.

For example, if you put $1,000 into an account or investment with a guaranteed 5% annual return, the future value of that money will be $1,050 in a year. So the discount rate in this case is 5%; you would discount $1,050 by 5% to arrive at its PV.

Sinking Funds

There is also the option to use the TVM calculation for so-called sinking funds, which is actually a savings strategy.

If you’re saving up for something in the future and know how much you need to save, you can figure out how much you need to save each month or year to reach that goal if you are earning interest on those savings.

Real Estate Investments

An investor might look at a property in a high-growth neighborhood and predict that it will be worth a certain amount in five years, but they want to calculate whether it is actually a good investment. They can use the TVM calculation to discount that estimated future value to find out the current value and see how the two compare.

Investing With SoFi

The time value of money (TVM) is an important concept for investors. It underscores the notion that time affects the value of money, along with other factors, and being able to calculate TVM in different scenarios, from investing to business, can help you decide whether one choice is likely to be more profitable over time.

Ready to invest in your goals? It’s easy to get started when you open an investment account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), mutual funds, alternative funds, and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

FAQ

Why use the time value of money concept?

A dollar now is almost always worth more than that same dollar in the future, owing to that dollar’s potential for growth (and the diminishing effect of inflation) over time. Using TVM formulas, it’s possible to gauge the long-term impact of different choices so you can make the more profitable one.

Is the time value of money concept always true?

Yes, for the simple reason that it’s always possible to invest your money now and gain some interest over time, even a minor amount.

What are some factors that may affect the time value of money?

The main factors that can impact the time value of money are the rate of interest, the number of years the money will earn that rate, and how often interest compounds.

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