What is a deductible and what does it mean in insurance?
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Before you purchase an insurance policy, you’ll be asked to set a deductible. If you’re a first-time insurance buyer, the word ‘deductible’ is an important term to know. In this article, we’ll explore what a deductible is, how they work and key aspects to keep in mind. You’ll also learn about how deductibles affect your premium.
What is a deductible?
A deductible is your up-front contribution to a claim that is factored into what insurance will pay out. When you file an insurance claim, your insurance company pays for most of the cost. But before they contribute, your deductible is subtracted from the payout amount. Most insurance policies, including home and auto, require a deductible.
How does a deductible work?
Once you have filed a claim with your insurer and it has been approved, the company will reimburse you for the loss, minus the cost of your deductible. For example, say your deductible is $1,000, and your claim gets approved for $10,000. You would have to pay the $1,000 out-of-pocket for repairs, and the insurance company would write you a check for the remaining $9,000.
For home and auto insurance, deductibles only apply to physical damage. There is no deductible required if you’re filing a liability claim. Each time you file a property damage claim, you’ll pay the deductible (with a few exceptions).
Deductibles come in two forms—a specific dollar amount, or a percentage of the total amount of insurance you have. When you purchase an insurance policy, you are given the option to choose your deductible amount. The total amount of your deductible has a relative impact on your premium as well.
Types of deductibles
Depending on the form of insurance you have, you might encounter several types of deductibles. Here are the most common deductibles for home and auto insurance:
If you live in an area with a high risk of hurricanes, like Florida or Texas, your home insurance company might require you to pay a hurricane deductible for hurricane-related damage. This deductible usually applies when the National Weather Service (NWS) declares a hurricane warning, or categorizes a hurricane based on intensity prior to the event of loss. Hurricane deductible triggers vary by state and insurance company.
If you live in the midwest, be prepared to pay a wind and hail deductible for certain storm damages. The specific deductible amount varies by insurance company, but wind/hail deductibles are typically a percentage of the home’s dwelling policy limit. The percentage ranges from 1-5% according to the Insurance Information Institute (III).
Flood insurance deductible
Homeowners insurance doesn’t cover flood damage, so if you live in a flood-prone area, having flood insurance is important. However, you’ll pay a separate flood insurance deductible for flood claims. It’s usually a percentage of the home’s dwelling policy limit, but every flood insurance policy will differ.
Earthquake insurance deductible
Similar to flooding, home insurance doesn’t cover earthquake damage. Homeowners in states like Alaska and California should consider purchasing earthquake insurance to fill the gap in coverage. If your home does sustain earthquake damage, you’ll have to pay an earthquake insurance deductible. The III estimates that most earthquake deductibles are between 2-20% of the home’s replacement value.
What is a minimum deductible?
Although you can set your own deductible, there’s typically a minimum amount. You can’t choose a deductible of $0 to avoid paying any money out-of-pocket towards a claim. Each insurance company sets their own minimum deductible, but expect to pay at least a few hundred dollars.
The minimum deductible for auto insurance tends to be slightly less than it is for home insurance. Some car insurance companies allow drivers to pay as little as $200 for their deductible. For home and renters insurance, insurance companies commonly set a minimum deductible of $500 or $1,000.
Can deductibles save you money?
Raising your deductible generally equates to paying a lower monthly premium. But it’s a common misconception that raising your deductible always leads to major savings on your insurance. In reality, a higher deductible is going to cost more money out-of-pocket in the event of a claim, and it may only lower your premium by a few dollars each month.
The exception is with collision coverage, which will generally save you more monthly if your deductible is higher. If you have comprehensive coverage and want to lower your insurance cost, there are more effective ways to accomplish this than raising your deductible, such as dropping non-essential coverages, or comparison-shopping to find greater savings. Keep in mind that having accidents on your driving record will cause your rate to increase, so practicing safe driving is the simplest way to save.
For homeowners with high-value homes, raising your deductible has a more favorable impact on your rate. With a higher deductible, you’re much less likely to file a small claim. This is typically reflected in a lower premium overall.
Policies without a deductible
Some insurance companies offer policies without a deductible, but there’s usually a catch—you might end up paying a huge premium, or get charged for other hidden costs. Insurance companies that offer zero deductible policies often charge a no-deductible fee, and you might also have to sign a deductible waiver. Before you choose a zero deductible policy, make sure you read and understand the fine print.
Why do I have to pay two deductibles?
Since home insurance and auto insurance are usually separate policies, you are obligated to pay separate deductibles for them as well. But what if one event causes a loss that affects both your home and vehicle? Do you have to pay two deductibles?
It depends on whether or not you have bundled home and auto policies under one provider, and whether or not the cause of loss can be definitively proven to be the same for both. It also depends on your provider, as each differs in whether or not a single deductible endorsement is offered.
How do deductibles work with health insurance?
Health insurance policies also have a deductible, but it’s different from a home or auto deductible. Once you’ve paid the full amount of your annual health insurance deductible, you usually only pay co-insurance or a co-payment when you get medical services moving forward.
However, some services, like basic checkups and vaccines, might be fully covered before you pay your entire deductible. Each insurance company and plan is different, so it’s a good idea to find out what’s covered and what you’re required to pay for your specific policy.
- A deductible is the amount of money you pay out-of-pocket towards a loss before the insurance company reimburses you.
- A higher deductible can sometimes provide significant savings on your monthly premium.
- Some specific losses, like hurricane and earthquake damage, often require a separate deductible.
Having a better understanding of deductibles can give you confidence as you purchase home or auto insurance. Because the deductible has an immediate impact on your finances in the event of a claim, don’t be tempted to choose a higher deductible just to lower your monthly payments. However, a higher deductible does encourage you not to file small claims, and can therefore save you significantly in the right circumstances.