What Is an Insurance Deductible
What is an Insurance Deductible?
The insurance deductible is the amount of money you will pay in an insurance claim before the insurance coverage starts paying you.
It is your portion of the financial responsibility and forms part of your insurance contract. You have to come up with the amount of money for your deductible before a claim gets paid in many circumstances.
You pay your deductible and the insurance company then agrees to pay you the rest (up to the policy limits and conditions in the wording).
Insurance Deductible Basics
In this article we will cover all the basics of a deductible, you can scroll down in the headings to find the information you are looking for, including links to other articles which cover certain questions in more detail if you need it.
How Does an Insurance Deductible Work?
Imagine the Deductible as Your Part of "the Deal". When you buy insurance you are protecting yourself against unforeseen financial risks that come in the form of losses or damages.
By buying insurance you are asking the insurance company to have your back if you suffer damages that could hurt you financially. In turn, the insurance company usually says, "Sure, I'll cover you if you have a loss, but will you agree to pay the first part of it by paying a deductible?" Using the example of a $500 deductible, you say, "Sure, I can afford to pay the first $500 of any loss, if you can pay the rest." They tell you how much they will charge you based on how much of the risk you're willing to cover yourself.
The part of the risk you are covering is the deductible.
Where Do You Find Out How Much Your Deductible Is?
Your deductible should be listed as part of the terms and conditions of your contract on the declaration page of your insurance policy If you are not sure what your deductible is, or where to find it, contact your insurance company representative and ask them. You should also ask them if there are multiple deductibles for different circumstances.
Examples of Deductibles:
- You may have one deductible for your home and contents, and a different deductible if the cause of loss is an earthquake. Earthquake insurance usually has higher deductible limits.
- Another example of different deductibles on one policy is if you have an endorsement or rider on your policy. The rider may have no deductible, even though the rest of your policy does. It's one reason a lot of people buy a rider, to avoid a deductible on certain high valued items, MORE>>
Who Decides How Much the Deductible Will Be?
As the person buying the insurance policy, you usually have the choice of how much of a deductible you will have. The higher the deductible, the lower the cost of your insurance.
You can think of the deductible as your self-insurance, the part you've agreed to pay.
As discussed above, it's your part of the deal because you take a cut of the loss for the "risk".
The higher the amount of risk you are willing to cover via the deductible, the less risk for the insurance company. Therefore, they reduce their cost. It's a partnership where you and the insurance company agree to share the financial risks.
What Is a Minimum Deductible?
Your policy may have a minimum deductible. Insurance companies want you to pay your part in a claim, so in most cases, the insurance company will set a minimum deductible. You can increase your deductible to save money, but you can not decrease it if the insurance company has set a minimum deductible.
What is the Minimum Deductible for Different Insurance Policies?
There is usually a minimum deductible that varies by policy type. For example, a home policy might have a $500 minimum deductible. The minimum deductible will vary by state and policy.
Some companies offer zero deductibles or disappearing deductibles, so be sure and ask how your deductible works and if there is a minimum deductible or the option to have a zero deductible. Just remember, the lower the deductible, the more you usually pay. Read more about this below.
Even though you pay more of the claim when you have a higher deductible, the reality is that people do not have claims every year. So every year you do not have a claim, and took a higher deductible, you could be saving as much as 20% or 30% on your insurance costs.
You can learn more about how to save money by increasing your deductible here. You can change your deductible on your insurance policy to fit your needs, increasing it more than the minimum will save you money. The only exception is if you have claims frequency, in which case the insurance underwriters may impose a higher deductible on you but not give you a discount.
Two Kinds of Deductibles
- A deductible may be a dollar amount
- A deductible may be listed as a percentage of the building or dwelling insured value. This is more common with coverages such as earthquake insurance, windstorm and hail damage, or on properties that may have higher risks or non-traditional home insurance like vacant homes.
Simple Example of How the Deductible Works
For example, if you are robbed, you have $6000 of stolen items, but you have a $1000 deductible, you will pay the first $1000 of loss and the insurance company will pay the remaining $5000.
There are more complex examples that may help you if you are looking up this information because you need help figuring out how much you are supposed to be paid in a claim, our article on special limits of insurance and how they can affect a claims settlement may also be helpful.
Different Types of Insurance Policies Offer Different Kinds of Deductibles
Insurance is regulated by state and this applies to deductibles as well. You can ask your agent about your own state laws or contact your state insurance commissioner to fully understand how the laws impact deductibles in your area.
How Does the Deductible Work a Claim?
Home and car insurance usually apply a deductible per claim. A claim would be the incident causing a loss.
Are There Policies With No Deductible?
A lot of people have asked; "Can I get a policy with no deductible?", there are policies that will charge you for having no deductible or may offer you a deductible waiver. A deductible free policy or even a loyalty waiver of deductible is possible.
How to Find a Policy Without a Deductible
You want to be careful about each of the above circumstances where there is no deductible and always ask how much the policy is without the waiver, vs. how much the policy is with the waiver.
If the cost is the same, then consider it a loyalty perk, or a nice feature of the policy you are buying. If there is a cost, then it is up to you if it is worth your while to pay more.
There's a lot more information in our article about understanding deductible waivers and how to get a loyalty deductible.
Why Do I Have to Pay Two Deductibles?
You pay one deductible per claim, in most circumstances, but every time you make a claim during a policy term, you will have to pay the deductible again.
If you run into some bad luck and have two incidents very close together that are unrelated, the insurance company will view this as two incidents. If you have two claims in one policy term, even if they are two days apart, you will have one deductible per incident. The deductible will also apply for each individual incident, even if the cause of the damage for each claim is the same.
Can I Avoid Paying Two Deductibles?
The only way to avoid paying two deductibles is if you show that the incidents were related or caused by one another.
Insurance companies are pretty good at determining cause of loss, but if you think they could use more information on the circumstance and it may prove the incidents were one and the same, and not two separate incidents, then it is worth communicating this with your insurance adjuster,
There are exceptions when you may not have to pay your deductible, or only one deductible may apply, for example:
- For hurricane damage, the deductible may apply per season or by calendar year. For example, Florida is the only state that uses calendar year deductibles for hurricane insurance claims.
- For flood insurance claims, there may be separate deductibles for your building structure and contents.
- When you insure your car and home with one insurer, and the insurer has agreed you will only have one deductible in a loss that affects the two. This is an advantage of having your home and car insured together that could save money on your insurance costs.
Does a Deductible Apply for Liability Claims?
Deductibles do not apply to car liability and home insurance liability claims. They generally apply to the physical damage on home and auto policies.
Health insurance policies take a different approach, understanding the basics of your health insurance policy terms becomes very important when deciding on deductibles. You do not want to risk your health because you took a health plan with too high of a deductible. You should shop your health insurance because even the health insurance marketplace does not always have the best price.