One of the most synonymous terms in insurance is deductibles. But what, exactly, is a deductible? You’ll inevitably have to select your insurance deductible when you purchase a car, home or renters policy. And at some point, you’ll most likely have the unfortunate experience of paying a deductible for a claim on one of those policies.
But understanding what a deductible is, what it means when you have a claim, and when you have to pay it can help you make a smarter insurance decision on your policy.
What is a deductible?
Your deductible is the amount you are responsible for paying after filing a claim, before your insurance company starts paying for further costs associated with the loss. For example, let’s say you have a $500 deductible on your car insurance policy for collision protection and you cause an accident that results in $3000 worth of damage.
You would pay the first $500 — your deductible — and then your insurance company would cover the remaining $2,500 worth of damage.
It works the same way for a homeowners or renters insurance claim that has a deductible associated with it. If a tree falls on your roof and causes $7,000 worth of damage, and you have a $2,000 deductible, then you’d be responsible for the first $2,000 before your insurance company paid the remaining $5,000. Keep in mind that your insurance company will only pay up to your policy’s limit.
What are common deductible amounts?
For a car insurance policy, you’ll likely have to select from one of three deductible amounts: $250, $500 and $1,000. For a homeowners policy , your deductible may be a dollar amount or a percentage-based amount based on your home’s value. So if your house is worth $200,000 and you have a two percent deductible, your deductible would be $4,000.
You might be wondering: why would you select a $1,000 deductible if you’d be responsible for more out-of-pocket than if you had a $250 deductible?
This is because your deductible amount will impact your insurance premium. A policy with a $1,000 deductible would generally have a cheaper rate than the same policy that had a $250 deductible. A higher deductible means you’re taking on more of the risk if you later experience a claim, thereby having to pay more out of pocket if you later have a claim. So if you choose a higher deductible, you’re typically rewarded with a cheaper premium.
When considering what deductible to select, consider what would happen if you had an expensive claim, and you were forced to pay the deductible. What would it mean for your finances? Saving money on your premium by selecting a higher deductible amount can be great, but make sure you are comfortable paying the more expensive deductible in the event you have to file a claim.
One other thing to consider if you have a loss is whether filing a small claim is worth it. For instance, if you have $1,000 of damage to your car and a $500 deductible, you could file a claim and have your insurance company cover $500. But by filing a claim, your premium will likely increase at the next renewal. In some cases, it’s best to handle smaller claims out-of-pocket if you can afford it, as it will keep your premiums cheaper over time.
Other types of deductibles and claims with no deductible
Some claims have a different deductible associated with them, depending on what they are for. A good example of this is hurricanes. In many coastal states, a homeowners insurance policy will have a separate deductible for damages caused by hurricanes.
So in the event you file a claim for damages caused by a hurricane or a named tropical storm, you may be subject to a more expensive deductible (hurricane insurance deductible) than the standard deductible on your homeowners policy. As always, it’s important to consult your agent or insurance company.
In other claims, you may not have to pay a deductible at all. For instance, liability insurance — for car, home or renters — typically doesn’t have a deductible associated with it. If you injure someone in a car accident that you cause, your insurance company would cover the associated costs up to your policy’s limit without any deductible. Generally speaking, deductibles are only for damages to your own property.
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