Deductibles in Insurance: What You Need to Know

When it comes to insurance, deductibles are an important part of understanding your coverage. Simply put, a deductible is the amount you have to pay out of pocket before your insurance coverage kicks in. Having a deductible can help lower your monthly premiums, but it’s important to understand how it works before choosing a plan. In this article, we’ll explain everything you need to know about deductibles in insurance.

What is a Deductible?

A deductible is a set amount of money that you have to pay before your insurance coverage begins. For example, let’s say you have a $500 deductible on your car insurance. If you get into an accident and the repairs cost $2,000, you would have to pay $500 out of pocket and your insurance would cover the remaining $1,500.

The purpose of a deductible is to share the cost of a claim between you and your insurance company. By paying a portion of the cost, you are less likely to file small claims and your insurance company is less likely to have to pay out for minor damages.

How Does a Deductible Work?

When you sign up for an insurance policy, you’ll choose a deductible amount. This amount can vary depending on the type of insurance (car, health, homeowners, etc.) and the level of coverage you choose. Once you’ve chosen a deductible, it will apply to every claim you make under that policy.

Let’s continue with the car insurance example. If you get into another accident a few months later and the repairs cost $1,000, you would only have to pay your deductible of $500 and your insurance would cover the remaining $500.

It’s important to note that your deductible resets each time you file a claim. In other words, if you have a $500 deductible and file a claim for $1,000, you will have to pay the $500 deductible. However, if you file another claim for $500 a few months later, you won’t have to pay anything out of pocket because your deductible has already been met.

Types of Deductibles

There are two main types of deductibles: a per-incident deductible and an annual deductible.

Per-Incident Deductible

A per-incident deductible is exactly what it sounds like – you pay a deductible for each individual claim you make. Using the car insurance example again, if you have a $500 per-incident deductible and get into two accidents in one year, each costing $2,000 to repair, you would have to pay $1,000 out of pocket ($500 for each accident).

Annual Deductible

An annual deductible is a bit different. With an annual deductible, you only have to pay one deductible per year, no matter how many claims you make. Using the same example as before, if you have a $500 annual deductible and get into two accidents in one year, each costing $2,000 to repair, you would only have to pay $500 out of pocket (the annual deductible). If you filed another claim later in the year, you wouldn’t have to pay a deductible because you’ve already met your annual limit.

Pros and Cons of a Deductible

Like most things in life, there are pros and cons to having a deductible on your insurance policy.

Pros

• Lower premiums: By choosing a higher deductible, you can lower your monthly premiums. This can be a good option if you’re looking to save money on your insurance.
• Less stress on insurance companies: By having a deductible, you are less likely to file small claims for minor damages. This means your insurance company won’t have to pay out as much money and may be more willing to offer you coverage in the future.

Cons

• Higher out-of-pocket costs: If you have to file a claim, you’ll have to pay your deductible before your insurance kicks in. Depending on the amount of your deductible, this could be a significant amount of money.
• Less coverage for minor damages: Depending on your deductible amount, your insurance may not cover minor damages. For example, if you have a $1,000 deductible and get a small dent in your car that only costs $500 to repair, you’ll have to pay for the repair out of pocket.

FAQ

How do I choose a deductible?

When choosing a deductible, it’s important to consider how much you can afford to pay out of pocket in the event of a claim. If you have a healthy savings account and can afford a higher deductible, choosing a higher number can help lower your monthly premiums. However, if you don’t have much savings or can’t afford a high out-of-pocket cost, a lower deductible may be a better option.

Can I change my deductible?

Yes, you can usually change your deductible by contacting your insurance company. Keep in mind that changing your deductible can affect your monthly premiums, so be sure to consider the impact before making a change.

Do all insurance policies have deductibles?

No, not all insurance policies have deductibles. It’s important to read the terms of your policy carefully to understand what is and isn’t covered, as well as any deductibles that may apply.

Conclusion

Deductibles are an important part of understanding your insurance coverage. By having a deductible, you share the cost of a claim with your insurance company, which can help lower your monthly premiums. It’s important to choose a deductible that you can afford and understand how it works before signing up for an insurance policy. If you have questions about your deductible or insurance coverage, be sure to speak with a qualified insurance agent or representative.