Mastering Insurance Deductibles: Your Key to Financial Protection
If you’re shopping for an insurance policy of any kind, you’ll soon discover that there is a myriad of terms that you need to understand. But if there’s just one you absolutely must ‘get’, it’s ‘insurance deductible’. There are several annual deductibles you might face in life, but only one has direct bearing on your health insurance policy.
It’s time to clear up this key term in your insurance dictionary, so you can feel confident that you’ve made the right choices in your insurance policy and know how to continue to handle your insurance wisely. What exactly is an insurance deductible? How does an insurance deductible affect your policy and your finances? What decisions might you need to make when it comes to your insurance deductible? Let’s get to the bottom of it.
What Is an Insurance Deductible?
An insurance deductible is the portion of a claim an insured individual must cover before the insurance company pays eligible expenses. It is your money out-of-pocket before your insurance company pays the rest, up to the policy’s limits.
How Does It Work?
When you buy an insurance policy – either for auto insurance, home insurance, health insurance or virtually any other coverage that allows you to make a claim for ‘loss’ – your policy will contain a deductible stated in the policy terms. For example, you might have a health insurance policy that has a $1,000 deductible. If you have medical expenses covered by the policy that come to $5,000, you’ll have to pay the first $1,000 of your own money, and your insurance company will pay the remaining $4,000, provided other policy provisions don’t apply.
Types of Deductibles
Insurers use different names for the concept – ‘excess’, ‘retention’ and ‘deductible’ are popular – and there are different variations of how it works. Here’s a typical breakdown of a standard American auto insurance policy with a $500 deductible, covering bodily injury liability (BIL) and property damage liability (PDL):
Fixed Dollar Deductible: This is the one where you need to pay a fixed dollar amount out of pocket before your policy coverage takes effect.
Percentage-Based Deductible (PASS): This is the type of deductible that is based on a percentage of the total claim amount. For example, suppose your policy has a 10 per cent deductible and your claim is for $10,000. You are responsible for $1,000 (since 10 per cent of $10,000 is $1,000), and your insurer covers the balance of the claim, $9,000.
Combined Deductible: in cases where the policy covers multiple perils or types of coverage, e.g., homeowner’s insurance, the insured might bear a combined deductible for the policy.
Why Do Deductibles Exist?
Insurance deductibles serve several purposes:
Risk management: Deductibles help to manage risk by putting the skin in the game of the party who is set up to benefit financially from fulfilling a claim. Since you’re only responsible for part of the cost when you file a claim, under a deductible, an insurance company can provide coverage at a more affordable premium.
Deterring Small Claims: By making the deductible payable by policyholders, it scares off people from flooding in minor claims for small expenses, which can keep the insurance up for everyone.
Promoting Better Behaviour: since you’ll be on the hook for the deductible, you’ll be extra-motivated to take steps to minimize the chance of something happening that will trigger those losses you’ve chosen to insure against in the first place.
Factors to Consider When Choosing a Deductible
When selecting a deductible for your insurance policy, consider the following factors:
Financial Condition: Choose a deductible amount that you can comfortably afford to pay out of pocket in the event of a claim.
High Premiums: Basic precept: policies with higher deductibles will have lower premiums. Conversely, policies with lower deductibles will have higher premiums. Find a sweet spot for premiums and risk tolerance within your budget.
Risk: What is your risk of making a claim, and how much would it cost? If you have lots of assets or think you’ll be making claims often, you’ll want a lower deductible.
Conclusion
To sum it up, when considering taking out an insurance policy, the premium that you pay is not the only important variable that you should think about. The deductible is another crucial element of the policy that will determine your level of out-of-pocket expenses, and the coverage that you should benefit from if a covered event occurs.
By properly understanding how deductibles work and by factoring in your own financial situation and the level of risk that you are exposed to, you will be able to consider relevant elements when selecting deductibles for the different types of insurance policies that you should ideally benefit from. The hope is that, by doing so, your life will become a little bit safer.
