The insurance world is filled with confusing jargon. However, one industry term that every insurance shopper should know is deductible. So, what is a deductible? A deductible is the amount you have to pay out of pocket before your insurance benefits begin. Once you pay the deductible, then the insurance company will pay the claim.
For instance, let’s say you go on vacation and while you’re away a torrential rainstorm causes a leak to spring from your roof, damaging a large section of your hardwood floors. You return home to a surprising mess and immediately file a homeowner’s insurance claim.
After submitting repair estimates, your home insurer approves a $10,000 settlement — but you have a $2,500 deductible. That means you’ll only receive $7,500, which is the settlement amount minus the $2,500 deductible.
Depending on the type of insurance, your deductible may apply every time you make a covered claim or just once a year (as is the case with health insurance). Additionally, there may be several deductibles for different types of claims — for example, one deductible for property damage from fire and another for losses from theft. Overall, depending on the type of insurance, your deductible amount will vary.
In addition to coverage for your property, many policies — such as auto, home and renter’s — also offer liability insurance that keeps you safe from the financial risk of a lawsuit. For liability claims, deductibles typically don’t apply.
How a deductible lowers your insurance costs
Deductibles help insurers reduce the financial burden of policy losses. Plus, they keep consumers from filing a bunch of small claims. However, most policies offer a choice of deductibles so you can tailor the coverage to suit your needs.
Additionally, some insurance policies may have a minimum deductible set by the insurance company. This is to guarantee that you are responsible for part of the insurance claim. Even if an insurance company offers disappearing deductibles, be sure to talk with an agent to understand what is asked of you from the insurance contract. Remember, you can always increase your deductible in order to save money in the long run. If you choose a lower deductible, you’ll most likely pay more in your insurance policy.
Car insurance policies usually offer deductibles in amounts such as $200, $500 or $1,000. If you choose $1,000, you’d pay the first $1,000 in covered damage and your insurer would be responsible for the remaining amount.
Home insurance also might offer deductibles in flat dollar amounts, or they can be a percentage of the insured value of your property. For instance, if your home is insured for $100,000, a 2 percent deductible means you’d pay the first $2,000 and the insurer would pick up the rest.
But no matter what type of insurance you purchase, the higher the deductible, the lower your premium will be.
However, never raise your deductible unless you’re confident that you could cover it in the event of an urgent claim — like a trip to the emergency room or a car crash. If you don’t have enough savings or credit to cover the potential expense, you’re better off sticking with a low deductible and paying a higher premium.
After all, the purpose of having insurance in the first place is to keep you and your family safe from potential financial losses.
Editor's Note: This is an updated version of an article originally published on Feb. 27, 2013.