Deducing Deductibles: How They Work

Deductibles: Dastardly or Darling?

One of the words most of us know when it comes to insurance is deductible.  Despite this, one of the questions we hear on a regular basis is this: “What is a deductible?”  Or, at best, “How does my deductible work?”  While we are all familiar with the term, it is one of those words that seems to create confusion rather than clarity.  So let’s dig into what exactly a deductible is, and what it means for your auto and home policies.

You borrowed my car and did WHAT? I HAVE A CRAZY HIGH DEDUCTIBLE!

Money up front, party in the back.

A deductible is the money you pay when you have an accident before your insurance pays out anything for the claim.  At first this may seem strange.  After all, you pay good money for your insurance policy, so why wouldn’t it pay for all of the accident?  The answer is that, if you so choose, your policy will pay all of the claim. (up to the limits you have selected for coverage, of course).  But you will find yourself responsible for a larger premium as well.

A deductible is a way for a policyholder to share some of the burden of risk with the insurance company, rather than transferring all of the risk through the policy.  With a deductible you pay less in premium (the amount you pay for your policy) overall, but you agree to pay part of the damage to your home or vehicle.  It is a way for you to reduce your payment, and hope that you can avoid an accident.  If you do get into a wreck, or have something happen to your home, then you would have to pay money up front before anything is given back to you for coverage.

An accident? Sigh. This is going to hurt…

What options do you have with deductibles?

Like most things in insurance, you have an option of how much or how little you want in a deductible.  For auto insurance, the deductibles can be pretty small, and usually range from $100 to $500.  Since houses are so much more expensive than vehicles, their deductibles are also higher, ranging from $500 to $5000.  The specifics will vary from state to state, and may change based on the company as well.

If you are debating whether or not to have a higher or lower deductible, there are two things you want to keep in mind.  First, take your driving record into account when trying to make this decision.  Are you prone to accidents, or, put another way, are you likely to use your insurance coverage?  If you do, and you have a high deductible, you are setting yourself up for out of pocket expenses – not to mention your premium going up due to having a claim or two.  That being said, if you are a fantastic driver, or have a very low-risk home, maybe a higher deductible makes sense.  Your chance of having to use your deductible would be fairly low, and you might save more money over the long run from having lower premiums.

The second thing to keep in mind is that large deductibles require a little bit of financial planning.  While most of us can come up with a $500 deductible after an auto claim, a $5000 up front payment after a homeowners claim might make some people hit the panic button.  If your budget is tight, and you think setting your deductible sky-high is a way to save money, you may be in for a rude awakening if you do have an accident.

Press in case of claim.
(Actually don’t and read THIS.)

Deductibles: Another way you are in control.

So use your deductibles wisely, as they are one of the ways you have control over how your policy operates.  And, as always, if you aren’t sure what a good deductible amount would be for a new policy, or if you are reevaluating your coverage during a review, just ask!  Talk to your agent about what the end goal is and work back from there.  Want to save money month-to-month and don’t mind paying out of pocket?  A higher deductible might do the trick (as well as paying EFT as we talk about here.).  Want to let insurance do the heavy lifting or don’t have money to spare in your budget?  A lower deductible might be right for you.  If you’re like most of us, you’re somewhere in the middle.  Let an agent help you fine tune your coverage amounts to make sure you have the protection for the best price possible.

And that’s it!  Now you’re a deductible pro.  Go on, tell your friends.  They’ll be impressed.

And if you still have questions, about, well, anything, just ask.  Fill out the form below and let us know how we can help.