An insurance deductible is the amount of money you will pay on an insurance claim before the coverage kicks in and pays the rest.
Here are some of the basics of insurance deductibles. Learn what they are, how they work, and how much they cost.
What Is an Insurance Deductible?
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 percent of the costs. This is more common for earthquake, windstorm, hail damage, or on higher risks 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. They'll pay up to the policy limits and send the money to you or the people that are owed.
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 them 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 they will charge you based on how much of the risk you're taking on.
Examples of How They Work
Say 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 they 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 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 if 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. Lower deductibles raise 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.
Insurance Deductible vs. Out of Pocket
Most policies come with an out-of-pocket limit. This limit 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, say 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 you can not decrease 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 if 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. So, each year you do not have a claim, you could raise it—saving you money.
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
When shopping for your insurance policy, 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.
Also, 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 incidents back to back that are unrelated, it is 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 a storm.
You can always talk to your provider and prove that two incidents were linked and should be one claim. They deal with thousands of claims per year and are good at finding out what caused them.
Major Claims and Disasters
There are some exceptions to paying your deductible or applying only one. Here are some examples:
- They 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 distinct deductibles for your building structure and contents.
- You insure your car and home with one insurer, and they have agreed you will only have one in a loss that affects the two.
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.
They are part of health insurance plans also. If you have a $1,000 deductible, you'll pay the first $1,000 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 if this applies to your plan.
- An insurance deductible is an amount you pay before your insurer kicks in with their share of an insured loss.
- The amount you'll owe will differ from plan to plan.
- You 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.
- They do not apply to car liability and home insurance liability claims.