Sure, you have an insurance policy, but how much do you know about it?
In this article, we’re tackling the age-old question: “How do deductibles work?”
The insurance industry is notorious for confusing rules and obscure jargon and deductibles fall under both of these categories.
You might understand it on a surface level but exactly how do deductibles work (and why do we need them in the first place)?
What is a Deductible?
Simply put, your deductible is the amount of money that you are responsible for paying when you file an insurance claim.
If you get into a car accident, for example, or a hailstorm damages your roof, you will have to pay a certain amount of money (that is, your deductible) before your insurance kicks in. So, if your deductible is $1,000 and your loss is valued at $4,000, your insurance company will cut you a check for the difference: $3,000.
You probably already have some experience with how deductibles work under your health insurance policy. But your home and car insurance policies don’t have copays, an annual deductible (hurricane deductibles can be an exception), or separate individual/family deductibles. Rather, your home and auto deductible is per incident.
How Do Deductibles Work?
The definition we gave above was a very simplistic view of deductibles. In practice, however, you may have some questions about how deductibles work.
What if my claim is less than my deductible?
If your deductible is $1,000 but it will only cost you $600 to repair your damage or replace the loss, your insurance will not cover the claim. In fact, in cases like this, it can sometimes (not always) be best to not even file a claim and just foot the bill yourself. Consult your independent insurance agent before making any decisions, though!
Are deductibles always a flat rate?
No. Some homeowners insurance deductibles are calculated as a percentage of your home’s insured value.
Can you have more than one deductible?
Unlike flood and earthquake insurance (which require you to purchase a separate policy) hurricane damage is covered under your homeowner’s policy. However, here in Florida, hurricane-related damages will have a separate deductible, typically a percentage of your home’s value.
Does every claim have a deductible?
Deductibles typically apply to property damage, comprehensive, and collision coverage. They do not usually apply to bodily injury liability payments toward third parties. So if a visitor is injured on your property, your insurance should cover all of their medical bills.
Low Premium / High Deductible
Every policy has a different deductible amount and you can usually choose how low or high your deductible is.
“Well, if my deductible is the amount that I have to pay, I should go with the lowest deductible I can, right?”
Your deductible is inversely related to your premium. This means that if one is low, the other is high. If you automatically select the lowest deductible amount, you may be stuck with a monthly or annual premium that’s way out of your budget. However, this doesn’t mean you should automatically go with the high deductible, either.
You should carefully consider your own unique situation before choosing a deductible.
How To Choose a Deductible
So, higher deductible or higher premium? Unfortunately, there is no “right” answer.
Whether you opt to save money upfront or at the time you file a claim is completely up to you. But before you put it in writing, you’ll want to consider a few important factors.
- How much deductible can you afford? In the event of a claim, how much can you afford to pay out-of-pocket before your insurance kicks in? If there’s no way you could pull $1,000 together if your car is totaled, then you might want to stick with the $500 deductible.
- What is your risk profile? What are your assets (i.e. house or car) worth and how good are you at taking care of them? If you get into a lot of accidents or your car isn’t worth very much, it might be best to stick with a low deductible.
- Is it worth the savings? Will picking higher deductibles really save you that much on premiums? If a higher deductible will only save you $100 a year, it might not be worth it. Do the math and talk to your insurance agent to find out which is the best option for you.
Why Are Deductibles Necessary?
All of this begs the question: “Why does my insurance policy have a deductible anyway? Isn’t that why I have insurance?”
This is an excellent question! But I have another one for you: what would happen if there were no deductibles on your insurance policies?
If everyone had a $0 deductible on their insurance policies—as well as super-affordable premiums—they would file claims for even minor damages. And with no stake in the matter, policyholders may open themselves to a lot more risk: driving recklessly, ignoring basic home maintenance, or allowing existing problems to get worse.
The number of claims would quickly drain the insurance companies’ coffers and the insurance industry simply wouldn’t work. Deductibles make it so that both policyholders and insurance companies are both motivated to keep claims to a minimum.
They might seem like an annoying feature of your insurance policy, but deductibles have an important role in sharing risk and reducing overall claims. Without deductibles, there would be no insurance to cover life’s little mishaps.
At Harry Levine Insurance, we don’t just want to provide you with insurance coverage, we want you to understand the ins and outs of your various policies (deductibles included). If you have any questions about your coverage, or you want a free quote, give us a call and one of our friendly agents will be happy to answer any questions you have.
We hope to talk to you soon!