Definition and Example of Insurance Deductibles
Insurance deductibles have been part of insurance contracts for years. When you sign up for a plan, you agree to pay a certain amount before the provider pays. It's the amount of money that you pay when you make a claim. Often, it is stated as a dollar amount. It could also be listed as a percentage of the costs, which is more common for earthquakes, windstorms, hail damage, or higher-risk assets.
You'll have to come up with your part of the bill before a claim is paid. Once you pay it, the insurance pays the rest of the claim up to the policy limits and sends the money to you or the people who are owed.
Suppose you backed your car into one of the light posts in the mall parking lot and caused $1,000 worth of damage to your car. If your deductible is $1,500, the insurance will not pay to repair the damage. If you had a $500 deductible, you'd pay $500, and the company would pay $500.
Often, there are discrete types of coverage under the same policy, each with its own deductible. You may also have one deductible for your home and its contents.
Another example of different deductibles on one policy is an endorsement or rider. The rider may have no deductible, even though the rest of your policy does. One reason many people buy a rider is to avoid a deductible on high-value items.
How an Insurance Deductible Works
You can think of deductibles as your part of the deal. When you buy insurance, you are getting someone else to cover the higher costs of any losses, damages, or healthcare.
You're asking the company to "have your back" if you incur an expense that could hurt you financially. In turn, the insurer agrees to cover you if you'll agree to pay the first part of the costs.
You'll look over the plans offered and choose your deductible. The agent tells you how much the company will charge you, based on how much of the risk you're taking on.
How Much Are They?
Insurance is governed by the laws of the state you live in. The laws also apply to deductibles. Talk to your agent about the laws in your state, or contact your state insurance commissioner to learn about the rules in your region.
If you are unsure what your deductible is or where to find it, ask your insurance agent. You should also ask whether there are multiple deductibles for different events.
Who Decides How Much It Will Be?
You can usually choose how much of a deductible you will have. A higher deductible means your monthly payments will be lower. A lower deductible raises your monthly payments.
If you want to use your deductible to save money on your insurance, there are various methods. For example, you might raise your deductible dollar amount to lower the cost of your home or auto policy.
How Do Health Insurance Deductibles Work?
It's vital to know how your health policy works—you do not want to risk your health because you chose a health plan with too high a deductible.
Deductibles are part of health insurance plans also. If you have a $1,000 deductible, you'll pay the first $1,000 of the cost of your care. Once you pay it, you typically only have to pay coinsurance or a co-payment when seeing the doctor.
With some policies, there are certain services, such as check-ups or disease-management programs, where you won't need to pay. That's why it's a good idea to check with your insurer and see whether that applies to your plan.
Insurance Deductible vs. Out-of-Pocket
The amount you have to pay before your insurance coverage kicks in
Contributes to your out-of-pocket maximum
The dollar limit you have to pay for the year, before your insurance covers the rest
Includes payments like deductibles, coinsurance, and copayments
Most policies come with an out-of-pocket limit, which is different from your deductible. Your out-of-pocket costs are the limit you should pay for a set period. If your policy had a limit for out-of-pocket costs for one year, you'd only have to pay up to a certain amount before your insurance would cover the rest.
For instance, suppose your out-of-pocket limit is $1,500. The light post took $500 of that from your annual responsibility. If it was a bad year on the road for you, and two other drivers hit your car in different accidents, you have $1,000 more worth of deductibles.
You no longer have to pay any other deductibles, since you met your out-of-pocket limit for the period. Your provider should now pay 100% of your covered expenses for the rest of the term (on that policy).
What Is a Minimum Deductible?
Your policy may have a minimum deductible. You can increase your deductible to save money, but not it if the company has set a minimum deductible.
Some companies offer zero deductibles or disappearing deductibles, so be sure and ask how your deductible works. Check for a minimum deductible, or ask whether there is an option to have a zero deductible.
How Can I Save Money With a Deductible?
Even though you pay more of the claim when you have a higher deductible, most people do not have claims each year. For every year you do not have a claim, you could raise it and save money that way.
You can change your deductible on your policy to fit your needs. If you can afford a higher one in one year but then feel that you would like to reduce it later, it is not usually a problem. Be aware that your payments will also change. If you have a high claims rate, your payments may also rise.
Policies Without Deductibles
Some policies come with zero deductible. However, you'll usually be charged a no-deductible fee, or you may have to ask for a waiver.
If you find a zero-deductible plan, always ask how much the policy is without the waiver vs. with the waiver.
It's important to note that they do not apply to auto and home insurance liability claims. They generally only apply to the physical damage on home and auto policies.
Why Do I Have to Pay Two Deductibles?
You pay one deductible per claim, but you will have to pay one each time you make a claim during a policy term.
If you run into some bad luck and have two unrelated incidents back to back, they will be viewed as two incidents. You'll need to pay once for each incident, even if the cause of damage for each claim is the same.
The only way to avoid paying two deductibles is to show that the incidents were related or caused by one another, such as damages to both your home and vehicle from the same storm.
You can always talk to your provider and prove that two incidents were linked and should be one claim. The company deals with thousands of claims per year and is good at finding out what caused the loss.
Major Claims and Disasters
There are some exceptions to paying your deductible or applying only one. Here are some examples:
- It may apply per season or by calendar year.
- For flood insurance claims, there may be distinct deductibles for your building and contents.
- You insure your car and home with one insurer, and it has agreed that you will only have one deductible in a loss that affects the two.
- An insurance deductible is an amount you pay before your insurer picks up its share of an insured loss.
- The amount you'll owe will differ from plan to plan.
- You'll pay one deductible per claim, but each time you make a claim during a term, you will have to pay it again until you reach your limit.
- Deductibles do not apply to car liability and home insurance liability claims.