What Is an Insurance Deductible?
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You mean other than a total bummer, right?
Simply put, an “insurance deductible” is the amount of money you must pay for an insurance claim, prior to an insurance company paying out any money for your loss or incurred expenses.
Another way to describe a deductible is the portion of an insurance-related bill your insurer WILL NOT cover.
However, it’s not paid out of pocket, rather a deductible is deducted from the payout you receive from the insurance company.
So if you’re owed $25,000, but you’ve got a $1,000 deductible in place on your policy, you’d actually only receive $24,000 when all was said and done.
The purpose of a deductible is to avoid the moral hazard one might present to the insurer if there were no penalty for filing a claim.
It’s basically in place to ensure the insured isn’t just filing claims left and right while living a high-risk lifestyle.
Because deductibles exists, you might actually take the time to lock your car doors and house, knowing you’ll have to pay a portion in the event of a claim.
Typically, a deductible is a flat dollar amount or a percentage of your policy limit, which is agreed upon at the time the policy is issued.
Your deductible options depend on the type of policy you are considering purchasing. A deductible can range from zero to several thousands of dollars.
Tip: The higher the deductible you choose, the lower your premium will be. In other words, the more you are willing to “self-insure,” the less your insurer will charge you for coverage.
Different Policy Type, Different Deductible Options
As discussed above, your deductible will vary greatly depending on which type of policy you are looking at.
Home, auto and health insurance policies each offer unique possibilities with regard to your deductible options. Let’s look at some examples of each.
Auto Insurance Deductibles
So if you are found liable (at fault) for damage to another person’s car or injury to another person in an accident, you DO NOT have to pay a deductible.
They’re only paid for physical damage claims for your vehicle, not liability claims.
You can choose a different (or the same) deductible for each of these types of coverage. The deductible you choose will depend on the value of each vehicle and your personal preference.
Common auto insurance deductible options are $250, 500, or $1,000.
Tip: The less valuable your vehicle, the lower the deductible you would want to choose. A $1,000 deductible for a $3,000 car doesn’t make sense. Especially if your car is not valuable and gets “totaled.”
The insurance company pays for the cost greater than the deductible to repair your car. If the total cost to repair the damage to your car is less than the deductible, you are responsible for paying for all the repair costs.
So it probably isn’t a good idea to file a $1,000 claim to fix your dinged bumper regardless of how low your deductible is.
If you have a $500 deductible, you would save $500 upfront, but may lose out on a lot of money in the future by paying higher insurance rates as a result of filing claims (and costing your insurer money).
Example 1: Rick has a $500 deductible for the physical damage coverage for his car. Rick crashes his car into a neighbor’s mailbox causing $3,000 in damage to his car.
Rick would be responsible for paying the first $500 to repair his car. Rick’s insurance company would pay the additional $2,500. It’s important to note that the cost to repair the neighbor’s mailbox would be covered by Rick’s liability coverage.
Example 2: Ray has a $250 deductible for the physical damage coverage for his car. Ray accidentally backs into his neighbor’s mailbox at a slow rate of speed, causing only $100 damage to his car and no damage to the neighbor’s mailbox.
Since Ray’s deductible is $250, he is responsible for all the repair costs associated with the accident. His insurance company would only pay for damage in excess of $250.
Keep in mind that the deductible is paid each time a separate claim is filed. So if you have multiple insurance claims for damage to your car in a single year, you would be responsible for paying multiple deductibles.
Remember, the number of insurance claims you file is held against you in the form of additional cost for insurance in the future.
Also, insurers may sometimes choose to non-renew your policy after the initial policy term is up based on you filing the claims.
Circumstances can vary greatly, but it may be a good idea to pay for small damages to your vehicle with your own money.
Homeowners Insurance Deductibles
These policies normally have two deductible options. Namely, a deductible for “wind/hail” related damage and “all other perils,” which refers to anything that damages your property other than wind and hail.
The wind/hail deductible may be expressed as a percentage of your home’s insured value.
An example would be a 1% deductible for a $200,000 home. This would result in a $2,000 deductible for property damage associated with a wind storm ($200,000 x 1%).
The same policy may have a $1,000 deductible clause for damage caused by anything else. So, if you have a small kitchen fire, you are only “on the hook” for $1,000.
This is because your small kitchen fire will not affect 200 other homes in your area.
Your insurer is not worried about paying out millions of dollars worth of claims all at once, which is certainly the case when a tornado or hail storm affects an entire city.
[See: Tornado insurance]
Tip: As property insurance premiums continue to rise, national chain insurers such as State Farm are mandating higher insurance deductibles in certain states.
Be sure to shop your insurance premium if you insurer demands you opt for a higher deductible. Ultimately, they are “lowering” your insurance costs by not paying as much for covered claims.
Health Insurance Deductibles
Health insurance is a different animal altogether. However, The concept of a deductible is still the same. You pay for a certain amount of service before your insurer coughs up the first dime…nothing new here.
So, not only do you cover the first “whatever” dollar amount of yearly services, but you also share a percentage of the expenses that exceed your deductible.
You might pay the first $1,000 per calendar year, but also be responsible for 20% of any cost above that deductible.
In conclusion, there is almost always a way to save on your insurance premiums. Be sure to shop online each year or visit a local independent insurance agent to discuss your options.
This is especially true if your current insurance agent recommends you raise your deductible to save money on your annual premium.
It’s the same as saying, “I can save you money if you are willing to pay more of your hard earned money in the event of a claim.”
Note: Deductibles are almost never associated with liability claims, rather only property damage.
However, commercial general liability policies can contain a deductible clause for claims made against your company related to liability resulting from your negligence.
(photo: Marcin Wichary)