What is First Dollar Coverage?

First dollar coverage is a type of insurance policy with no deductible where the insurer assumes payment once an insurable event occurs. While there is no deductible, the amount the insurer will pay out is often lower than on similar plans that have a deductible, or premiums for the first dollar plan will be higher.

Key Takeaways

  • First dollar coverage is a type of insurance where there is no deductible or copay.
  • The insurance company starts covering costs on the first dollar claimed.
  • First dollar coverage is typically more expensive than a similar deductible plan. If costs are similar, then the first dollar coverage plan will likely have lower payout limits than a deductible plan.

Understanding First Dollar Coverage

First dollar coverage plans are available on health insurance, homeowner's insurance, and car insurance policies, among others.

First dollar coverage usually exists all the way up to the full amount of the policy, though the full amount here is considerably lower than the full amount in the more common deductible-based plans. Due to this, first dollar policies are not as popular as deductible plans. For example, many first dollar health insurance plans will have low limits meaning that there is a cap on the maximum amount the insurance company will cover.

First dollar insurance plans have higher premiums because the insurer is bearing a greater risk for the insured item. For example, with a first dollar health insurance plan, the insurance company will charge the customer higher premiums since the insurer begins payment with the first covered service the patient receives. First dollar coverage tends to be less prevalent in the home and car insurance industry because of the higher premiums.

Critics of first dollar coverage argue that it places unnecessary strains on the health system and drives up prices because those with this type of coverage tend to overuse or misuse health services. On the other hand, there are those that contend that patients without first dollar coverage often put off visits because they have to pay out of pocket costs. This can have the unintended effect of exacerbating their issues, leading to longer, and more expensive, procedures.

Benefits and Drawbacks of First Dollar Coverage

First dollar coverage has advantages and disadvantages. Ultimately, the insurer needs to be compensated for the insurance they are providing. This means that different insurance coverage is going to offer some things at the expense of others. It is up to the person seeking insurance to determine the features that are most important to them.

Pros

  • No deductible or copayments when filing a claim.

  • The insurer covers claims from the start, without the insured needing to cough up money to cover the claims.

Cons

  • Higher premiums than a similar deductible plan.

  • If the premiums on a first dollar and deductible plan are similar, the insurance company is likely to provide less coverage on the first dollar plan relative to the deductible plan.

Example of a First Dollar Car Insurance Policy

Assume that a driver damages their car when driving into the garage. They take the car to a body shop and the damage is estimated at $3,000. Typically, in this situation, the person may opt to pay to fix the damage themselves, or if they can't afford the upfront cost they may file an auto insurance claim. Filing a claim usually involves paying a deductible, such as $250, $500, or $1,000 depending on the insurance policy. Lower deductibles typically have higher insurance premiums.

The insurance company covers the cost, but the driver is also paying some of it by way of the deductible. If the deductible is $500, they are sending $500 to the insurance company and receiving $3,000 for a net inflow of $2,500 to cover the damage costs.

Assume the driver has a first dollar car insurance policy. This means they don't need to pay the deductible. The insurance company pays the full amount, and the driver receives the $3,000. At first glance, the driver is better off with this policy since their net inflow to cover accident costs is greater.

Things to consider, though, are the premiums and coverage. All else being equal, first dollar policies cost the insurance company more, so they will charge a higher premium. When an insurable event occurs, the driver's out of pocket costs are less, but each month or year that driver is paying more in premiums, which offsets that advantage. Also, coverage limits may be lower with the first dollar policy. This is especially likely if the premiums seem comparable with a deductible plan.