By Jenn Sanders
Insurance policies, with their jargon, legalese, and exclusions, can be confusing. One confusing area, in particular, is the insurance deductible. You’ll find almost all insurance policies have some form of a deductible, from auto to health to commercial insurance. So, what is an insurance deductible?
WHAT IS AN INSURANCE DEDUCTIBLE?
An insurance deductible is a set amount that the policyholder has to pay out-of-pocket before the insurance company will cover a claim, as outlined in the policy. For example, say there’s a fire in your rental home and the smoke damages some of your belongings. With the help of your home inventory, you determine that the amount of damage is $2,500 (to replace your damaged belongings). Your renters' insurance policy has a $500 deductible, so you’ll pay the first $500 to begin replacing those belongings, then your renters' insurance policy will kick in to cover the remaining $2,000.
Insurance companies use deductibles as a way to share risk with their policyholders. By sharing some of the costs of filing a claim, insurance companies ensure that their customers aren’t just filing claims willy-nilly but in the event of a true loss. By doing this, insurance companies also help minimize their risk of insurance fraud. A deductible ensures that the insured has a financial stake in filing a claim, thus making bogus claims more unlikely.
Deductibles are usually flexible. An insurance agent, like one of our insurance advisors, can help you figure out what deductibles your policy offers and how much you can raise or lower it. An advisor will also be able to tell you how much a lower deductible would affect your premium.
How does an insurance deductible work?
As outlined above, your deductible means you’ll carry some of the financial burdens of filing a claim should you need to file one. Once you meet your deductible, however, all further eligible claims during that policy term will be covered by your insurance policy in full. Once the policy term ends and a new one begins (like when your policy comes up for renewal), you’ll have a new deductible to meet before your claims are covered.
The downside of additional claims being covered in full after you’ve met your deductible is that in many cases, the more claims you file on a home, auto or renters policy, the more your rates will rise in the future. Claims are an indicator of risk, and, unfortunately, more claims on your policies signals to insurance companies that you’re a riskier individual to insure. If you have a bad year, there are ways to try and lower your rates, like raising your deductible, bundling your policies or looking into other discounts.
How insurance deductibles can help you save on insurance
Deductibles and policy premiums have an inverse relationship. Generally, as the deductible goes up, the premium goes down and vice versa. This can lead to trouble, however, if you raise your deductible too high in an effort to save on your premium, and realize you’re unable to meet your deductible out-of-pocket in the event of a claim.
You may find the premium savings may not justify raising your deductible. Let’s use an example from this article on renters' insurance deductibles. Say that you’ve raised your deductible from $500 to $1,000 in order to save on your premiums. This deductible increase saves you $10 per month on your premium. That means it would take 50 months to make up the difference, which is just over four years. If your risk is low, you’d be able to pay $1,000 out-of-pocket, and you’ll be renting for a long time, that savings may make sense.
Playing around with deductibles and premium cost is best done with the advice of a licensed insurance agent. A licensed agent can help you shop around for a policy to find the best pricing as well as explain the different deductible options and their impact on your premium.
Determining the right insurance deductible
The right deductible is unique to every insured and situation. What works for a friend may not work for you. The best way to determine the right amount for your insurance deductible is to speak with a licensed insurance agent, like one of our insurance advisors, to understand the full picture of how much a higher deductible could help you save on your premium, while also taking your budget into account. Whatever deductible you choose, remember, you’ll need to pay that amount out-of-pocket if you need to file a claim.
Original article posted here