Unexpected costs can shatter any budget – even if you have insurance. Whatever you're insuring – your car, house, or even yourself – understanding your deductible in advance can help you plan for those expenses as you're preparing to file a claim.
Your insurance deductible is the portion of the loss that you are responsible for paying if you have an insurance claim, and it is part of the money you pay for your insurance coverage. Understanding the definition of this term can be helpful when choosing coverage.
The insurance deductible definition is straightforward. It is how much you agree to pay toward a covered loss for a bill that will be reimbursed by your insurance company, in accordance with your policy. So, in the case of a car insurance deductible of $500, your insurer usually pays the balance after you contribute the first $500 toward an approved covered repair bill.
For auto and homeowners insurance, deductibles are generally applied to each individual claim, but auto deductibles are applied per covered event, while health insurance deductibles usually apply to certain qualified medical expenses during a plan year. There may be other policies with additional deductibles.
Let's say, after an accident, your car incurs $3,000 in damage that's covered. How does an insurance deductible work if your collision deductible is $500? You'd pay the first $500, and then the insurance company would generally pay the rest of the costs – $2,500 – if the claim was approved and your medical expenses were covered under the policy.
This insurance deductible example demonstrates how the deductible splits the cost of repairs with the insurer. If the costs of repairs are less than the cost of your deductible (say $300 in repairs and a $500 deductible), you are generally responsible for paying the entire amount. The insurance company doesn't pay the difference.
You usually pay a deductible when you make an approved claim in coverage that has one. Sometimes, your insurance company applies the deductible to the claim payment that you receive, so you pay the repair shop or service provider (the process varies by insurer and by type of claim).
Who pays the deductible in an insurance claim?
Typically, the policyholder is responsible. If another driver is to blame, your insurer may recoup its expenses from the other driver's insurer and refund your deductible (depending on the situation). Different rules may apply in the case of liability claims and other coverages.
The key difference between premium and deductible is the time at which you pay those. Premium is the sum of money you need to pay in order to keep your policy in place. The deductible, by contrast, is the sum you need to pay for a covered loss.
Knowing "what the difference is between an insurance deductible and a premium" is one way to better compare plans. A cheaper plan with a lower premium might be one that costs more if you get in an accident, get sick, or file a claim. Conversely, a more expensive plan with a higher premium might mean lower costs if you make an insurance claim.
If you select a higher deductible on a lot of coverage, your premium will be lower. You're agreeing to pay more out of pocket in the event of a covered claim, and the insurer pays less. Conversely, a lower deductible will generally mean a higher premium.
In some cases, though, the savings aren't enough to outweigh the increased deductible. Talk about a market difference: Get a side-by-side comparison of actual quotes and calculate how much you'd save each year, and factor that amount into the potential extra expense you might pay when you file a claim.
The decision to take a high deductible vs. a low deductible is based on balancing two competing costs: your typical cost of insurance versus potential out-of-pocket insurance costs. There is no best way, and the best way is different for everyone.
A high deductible might be better for someone with enough savings who prefers lower monthly expenses. A low deductible might be better for someone who doesn't like the prospect of paying a big bill unexpectedly.
A higher deductible might help if the premium savings are significant and if you have enough in your savings to pay the higher deductible. But it could be difficult to afford if you have an accident, property damage, or other covered loss when finances are tight.
When comparing a high deductible vs. a low deductible, take into account not only the savings you are probably going to get, but also how able you are to afford a bill. Never opt for a higher deductible just because your premium is appealing.
It's best to begin by taking a look at your emergency financial savings and your common bills. Your deductible needs to be a sum of money that you could pay without counting on high-interest credit or missing payments.
To determine the best insurance deductible, get quotes for various deductible levels and compare the difference in the annual premium. Consider your past claims history, the amount you are insuring, and how often you have repairs and/or medical care. For health insurance, consider the deductible and copays, coinsurance, and out-of-pocket maximums.
Here's how to choose the right insurance deductible:
What the car insurance deductible is depends on the company, what you're insured for, and your personal circumstances. You'll probably have options of $500 and $1,000, but it is likely you'll also have lower and higher options. You may need to balance how much you can pay out of pocket with your budget.
Think about the available deductibles. Once you are looking for your average car insurance premium, consider that the collision and comprehensive may have individual deductibles. Consider what coverage is provided and see if there are different deductible conditions, like some glass claims.
If you are unable to pay the deductible, you may have to delay the repairs or find another source of funds to pay it. In some situations, an insurer may reduce what it pays instead of charging you a deductible (on this claim only), but you still have to pay the deductible.
Save for surprise expenses before selecting coverage. If your insurance deductible is too high, check with your insurer to see if they offer a lower one and then look at the increase or decrease in premiums before making a switch.
A deductible is one of the factors you should consider when selecting your policy. Selecting a high deductible could lower your costs, while a low deductible could keep your expenses down when you need to make a claim.
Consider your budget, get rates from different policies, and choose a sum of money you could reasonably pay out of your pocket.
It depends. Not all claims and coverage have deductibles. There could be a deductible for specific types of services or claims on your policy, or you could have a different deductible for different events or per type of service. Make sure you read through your policy well.
Some insurers permit customers to switch their deductible during the policy term or at renewal. While it may not become effective immediately and your premium could change, check with your insurer when this change comes into effect and what terms will apply.
A deductible usually is the portion of a covered loss that the insurance policyholder must contribute, rather than part of the maximum amount an insurer will pay for a claim. After the deductible is met, your insurer usually will pay the remaining amount of covered expenses up to your policy limit.
Not necessarily. Individual deductibles could be included, and there might be a single family deductible. There is a chance that one person in the family can reach an individual deductible, and the entire family could have paid its deductible at that point.
Yes. Your insurer may have multiple deductibles on the policy or the renewal, applying each one according to the rules and contract. Read the renewal information, examine your options, and confirm the changes before the start of the new policy term.
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