What is an Insurance Deductible?

What is an Insurance Deductible?An insurance deductible is the sum of cash you must pay out of your own pocket for an insurance claim prior to the insurance company starting to pay on the claim. It’s typically stated in the policy as a fixed dollar amount, rather than a percentage. As a general rule, insurance deductibles and insurance premiums are inversely related. That is, the higher the insurance deductible, the lower the insurance premium. And of course, vice versa.

For example, a typical automobile insurance policy may have a deductible of $500. What this means if the insured has an automobile accident, you have to pay for the cost of repairs up to $500. Therefore, if the total car repair costs are $1,200, you will have to pay $500 (your deductible) and your insurance company will pay $700. Once you have paid the $500, you are said to have met the deductible.

Deductibles are usually defined per incident or per year. They can also vary depending on the origin of the claim. For instance, the same insurance policy may have varying deductibles when the loss arises from fire, theft, or natural disaster.

Based upon the insurance company and policy, an insurance deductible can be raised or lowered depending on how risk the insured is willing to assume. Insurance deductibles typically work the same whether the policy is for the home, car, or medical.

A policy with an exceptionally low premium will typically have an exceptional high insurance deductible. The key is finding the right balance for you when buying an insurance policy. A too high deductible can lead you into a financial bind should you find you need a claim. Additionally, a too high of a deductible on a car that has limited value may not make the most financial sense. On the other hand, a too low deductible can result in you overpaying in premiums.

It is a good idea to always have savings set aside in the amount of at least the size of your deductible, should you have to make a claim in the future.

Why Your Deductible Matters When It Comes to Home Insurance

It Does MatterWhen you’re in the market for homeowners insurance, you will probably spend a lot of time deciding whether to go for a policy with a lower monthly premium and high home insurance deductible, or a higher premium and a lower deductible. And though, in most cases, the amount of a home insurance deductible depends largely on how much the homeowner can afford on his or her monthly premiums, there are also other factors that influence insurance deductibles.

Do You Have the Cash?
It’s simple but true: the rainy day rule applies. No matter how much your home insurance deductible is, if you’re like most of us, you’ll have to dip into your savings in the event of damages. If you’ve got a savings account with a considerable amount of money you can access at any time, it might not be a bad idea to choose a higher home insurance deductible. With a higher home insurance deductible, you have the advantage of lower monthly premiums until disaster strikes—which it may never do. If this is the case, comparing quotes that feature a higher home insurance deductible should be your priority.

A Lower Home Insurance Deductible for Peace of Mind
If saving isn’t a luxury you can afford, or if you’re already using your savings for other things, like sending your children to college, it’s advisable to choose a higher monthly premium with a lower home insurance deductible. In the event of damages, you’ll be looking at a relatively lower sum for your home insurance deductible before your coverage kicks in. When comparing quotes, it’s the lower deductible that you’re looking for to keep your home safe.