What is an Insurance Deductible?
An “insurance deductible” is the amount of money an insured must pay, prior to an insurance company paying anything, for property damage in the event of a claim for a covered cause of loss.
Another way to describe a deductible is; the portion of a property damage claim the insurer will not pay. Deductibles are almost never necessary when dealing with liability insurance.
Typically, a deductible is a flat dollar amount assigned to a policy, agreed upon at the time the policy is issued. Depending on the type of policy and limits you purchase, the deductible can range from zero to several thousands of dollars.
Basic homeowner’s insurance and auto insurance deductibles rarely exceed $1,000. There are also certain types of coverage, wind damage for example, that use a percentage of the policy limit as your deductible rather than a fixed dollar amount.
Your deductible is designed with two purposes in mind. Both protect the insurance company financially.
First, a deductible serves to ensure claims are not filed for every scratch, dent or missing roof shingle from an insured’s property. It helps keep the cost of insurance down for everybody.
Settling claims can be very costly for insurers. If there were no deductibles, we would be much more likely to file claims for minor damages to our property. This would force insurers to raise our premiums to remain profitable.
With an insurance deductible in place, we’re much more likely to pay for minor repairs and damage out of our own pocket, as they may not exceed the deductible threshold.
The second purpose of a deductible has to do with human nature. Unfortunately, some individuals attempt to use insurance as a means to make a quick buck, while others simply don’t make the effort to make or take necessary precautions to avoid losses when they feel “protected” by an insurance policy.
In the insurance world, these potential causes of loss are referred to as moral and morale hazards.
Let’s look at some common examples of property damage and determine if you would file a claim based on the deductible associated with the insurance policy:
Auto Insurance Physical Damage
Example 1: You have a $1,000 deductible on your car insurance policy. Perhaps you back into your mailbox while pulling out of your garage, causing $350 in damage to your bumper. In this instance, you would pay for the damage out of your own pocket. Your insurer will not pay any money out on your policy until the damages exceed $1,000.
Example 2: You have a $1,000 deductible on your car insurance policy. You swerve out of your lane to avoid hitting a piece of debris on the roadway and run into a tree. As a result, you suffer $8,750 in damage to your vehicle. Your insurance company would pay the remaining $7,750 in damage, after you satisfy the $1,000 deductible.
Property Damage
Example 1: You have a $500 deductible on your homeowner’s policy. Your garage burns down after your grill catches on fire. The cost to replace the garage is $10,000. Your insurance company would pay the remaining $9,500 after you satisfy the $500 deductible.
Example 2: You have a $500 deductible on your homeowner’s policy. It’s taco night and you start a fire on your stovetop that burns one of your cabinet doors. The cabinet door costs $600 to replace. In this instance you may consider paying to replace the cabinet out of your own pocket, even though the cost is greater than your deductible.
You would have to decide if you wanted to file a claim and potentially see your rates go up when your policy renews, or pay the additional $100 out-of-pocket that your insurer would pay if you filed the claim.
The lower your deductible, the higher your overall premium and vice versa. Changing your deductible amount is an easy way to manipulate your insurance premium without messing around with your coverage amounts.