Insurance Deductible - What you need to know
A common characteristic of insurance policies when you file a claim is that you (the policyholder) pays a share of the dollar loss. This out‐of‐pocket money you have to pay before an insurance company covers the remaining costs attributed to your loss is called your deductible.
What is an Insurance Deductible? An insurance deductible is the amount you will have to pay in the event of a claim before your insurance activates. A higher deductible generally means a lower cost for the policy, but it also means you’ll have to pay more out-of-pocket if you have a claim.
Example of Insurance Deductible Let’s say you have an auto insurance or homeowners policy that has a $500 deductible. In the event you file a claim due to an accident or personal property damage, you’ll pay the first $500 (your deductible) to cover your share of the loss. Health insurance policies also have a contract feature called co‐insurance (or commonly referred to as a copay). This feature requires the insured individual to pay a fixed percentage of the loss after the deductible has been paid.
Here are some things to know about deductibles when deciding on a policy to buy.
A deductible may be a specific dollar amount or a percentage. If a policy has a deductible that’s a percentage, make sure you know how that translates to a dollar amount. Here are two examples for homes insured for $150,000
Policy A has a $500 deductible. A hail storm destroys the home’s roof, and the cost for repairs is $6,500. Policy A will pay $6,000 of the cost to repair the roof.
Policy B has a 5 percent deductible – or $7,500. If the home needed $6,500 in roof repairs, Policy B would not pay anything because the amount of repairs is less than the deductible.
Deductibles for home and auto insurance policies work differently than deductibles for health insurance policies.
For health insurance policies, the deductible usually covers a year.
For home and auto policies, the deductible will be applied to each claim. If you have a wreck in February and your car gets broken into in June, your insurance company will subtract the same deductible amount from the damages of each claim before paying.
In general, the higher the deductible, the lower the cost for the policy. When deciding what deductible is right for you, think about how much you can afford to pay if your property is damaged. Remember that filing small claims may affect how much you have to pay for insurance later. Switching from a $500 deductible to a $1,000 deductible can save as much as 20 percent on the cost of your insurance premium payments.
