What Is an Insurance Deductible?

by COUNTRY Financial

Deductibles are an important part of your insurance policies. When you have an insurance claim, your deductible is the amount of money you would pay for repairs to your home or car before your insurance would start paying. 

How does a deductible work? 

When you buy an insurance policy, you’ll select a deductible amount that you are financially comfortable with. Your insurance company will use this amount to set your premium. Your premium is essentially your monthly payment; it's the amount paid to your insurance provider to keep coverage active for a given time. It's usually paid monthly, but can also be paid annually.

Then, if something happens that’s covered by your policy, you’ll file an insurance claim. Once your claim is approved, your insurance company will take your deductible amount out of the total payout of your claim. You can always talk to an agent if you have questions about your insurance policy's deductible.

Types of insurance deductibles

Car insurance deductible example*

Consider what would happen if you set a $500 deductible on your car insurance and you cause an accident that results in $5,000 in damage to your car. You would be responsible for paying your deductible, that first $500. Then the insurance company would cover the remaining $4,500. 

Not all car insurance policies have a deductible. Liability coverage, for example, typically doesn't, but comprehensive coverage and collision coverage typically do. The difference between car insurance coverage that does and doesn't have a deductible is the amount of repairs. Because comprehensive and collision coverage deal with damage caused by a collision—whether another driver is involved or not—the damage is usually extensive, which can trigger a deductible.

Home insurance deductible example*

Let's say you have a house fire that causes $25,000 in damage to your home, including damage caused by the fire, smoke, and water from the efforts to put it out. If you have a $1,000 deductible on your home insurance, you’d pay that deductible with the home insurer covering $24,000, assuming the claim was within policy limits. 

How do deductibles affect my rates?

What you choose for your insurance deductible will impact the premium you pay for your insurance policy. In general, if you choose a higher deductible, you will have a lower premium, while a lower deductible will result in a higher premium. 

Why does having a higher deductible lower insurance premiums?

Having a higher deductible will shift more of the financial responsibility for a claim from the insurance company to you, reducing the insurer's risk and lowering their cost. If you have a high deductible and have a minor car accident or minimal damage to your home from a storm, you may not even have enough damage to file an insurance claim. Because you’ll be covering more of the cost of a claim, your regular insurance premium would be lower. 

How do I set my deductible? 

Most standard insurance policies use dollar-amount deductibles. You’ll select a specific dollar amount that you’re comfortable paying out of pocket if you have a claim. There are several things to consider when selecting your deductible, but here are two important ones:

Choose what’s best for your budget

Selecting a higher deductible could reduce your regular insurance payments. Opting for a policy with lower coverage and a higher deductible may provide some savings in the beginning, but it could mean paying more money out of pocket when you file a claim. If you file a claim for something that isn't covered or has a high deductible, you may have to cover more out of pocket than expected.

Consider how much risk you’re willing to take

While a higher deductible will typically result in a lower premium, you’ll be responsible for paying more out of pocket if you have a claim. You need to make sure you’re prepared to cover that cost if you have a claim.

Do deductibles work the same for all types of insurance claims?

Not all deductibles are the same. For example, earthquake coverage has a percentage deductible. And that deductible applies separately to each coverage impacted. (Note: Earthquake coverage is optional and not automatically included in your home insurance policy.)

Here’s how earthquake deductibles apply when there's damage caused by an earthquake to the structure of your home and your personal property. 

Earthquake deductibles for dwelling coverage

If your earthquake deductible is 5% and an earthquake damages your house, your deductible would be 5% of the dwelling insurance coverage you have. If your coverage was $200,000 on your home, your deductible* for your home structure (dwelling) would be $10,000. ($200,000 x .05)

Earthquake deductible for personal property coverage

If the earthquake also damages your personal property in your home, you’d be covered, but you’d have to pay the deductible on that coverage as well. If you have $100,000 in personal property coverage, you’d owe a $5,000 deductible* on that part of the claim. ($100,000 x .05)  

Even though it’s one earthquake (one occurrence), as the policyholder you would pay both deductibles, which could result in a large expense on an earthquake claim. Still, that deductible would be significantly less than paying the entire cost to repair or rebuild your home following an earthquake.

Why do insurance companies have deductibles?

Insurance deductibles play an important part in how insurance works and how companies can keep insurance affordable. Insurance policies include them to:

• Control insurance costs. Insurance deductibles reduce the number of small claims insurance companies must pay and process. Sharing the risk for those smaller claims helps control insurance costs and make rates more affordable for policyholders.
• Encourage responsible behavior. Since the first cost of an insurance claim is your responsibility, it makes sense that you'd take less risks with insured property or items to avoid insurance claims.
• Help prevent fraud. Most policyholders buy insurance for the right reasons: to protect their financial investments. However, according to the Coalition Against Insurance Fraud, insurance fraud costs the U.S. $308.6 billion (about $950 per person in the US) annually.

If insurance policies didn’t have a deductible, policyholders would receive the full amount of the claim from the insurance company. They wouldn’t have a financial stake to deter fraudulent claims which would likely lead to more fraud in auto and home insurance claims. When fraud increases, the cost of insurance increases. 

Set the right insurance deductible

Insurance is an important part of your financial plan, providing protection for your property, belongings and even yourself. By understanding how insurance deductibles work, you’ll be better prepared to make important decisions about your coverage. 

Talk with your your local insurance agent to choose the right deductible for your home and auto insurance needs. 

 

Updated 8-1-24