Deductibles in Insurance: Understanding What They Are and How They Work
When you purchase insurance, one of the terms you will encounter is the deductible. A deductible insurance is the amount you pay out of pocket before your insurance coverage kicks in. In this article, we’ll take a closer look at deductibles, including their types, benefits, and how they work.
Types of Deductibles insurance
There are two main types of deductibles: fixed and percentage-based.
Fixed Deductibles: A fixed deductible is a set amount that you must pay out of pocket before your insurance coverage begins. For example, if you have a $1,000 deductible for your homeowner’s insurance policy, you will need to pay $1,000 for any covered losses before your insurance company starts to pay.
Percentage-Based Deductibles: A percentage-based deductible is calculated as a percentage of the total loss. For example, if you have a 2% deductible on your $200,000 home, your deductible would be $4,000. This means that if you suffer a loss of $20,000, you would be responsible for paying the first $4,000, and your insurance company would cover the remaining $16,000.
Benefits of Deductibles
Deductibles serve several purposes, including:
Lower Premiums: Insurance premiums are the monthly or annual payments you make for your insurance coverage. By agreeing to a higher deductible, you can lower your insurance premiums. Insurance companies charge lower premiums for policies with higher deductibles because the policyholder assumes more of the risk. Long term care insurance
Reduced Claims: By requiring policyholders to pay a deductible, insurance companies can reduce the number of small claims they receive. This is because policyholders will often choose not to file a claim for small losses, such as a $500 car repair, because it is below their deductible.
Encourages Responsible Behavior: By requiring policyholders to pay a portion of the loss, insurance companies encourage responsible behavior. Policyholders are less likely to file frivolous claims and more likely to take steps to prevent losses from occurring in the first place.
How Deductibles Work
When you purchase an insurance policy with a deductible, you agree to pay a certain amount out of pocket before your insurance company pays for covered losses. For example, if you have a $1,000 deductible on your auto insurance policy and you get into an accident that causes $5,000 in damage, you will need to pay the first $1,000 out of pocket, and your insurance company will cover the remaining $4,000.
To learn more about how deductibles work and how to choose the right deductible for your insurance policies, check out this article from The Balance.
If you’re interested in learning more about how to lower your insurance premiums by adjusting your deductible, check out this guide from NerdWallet.
Deductibles are an important component of any insurance policy. They serve several purposes, including reducing the number of small claims, lowering insurance premiums, and encouraging responsible behavior. By understanding how deductibles work and choosing the right deductible for your insurance policies, you can effectively manage your risk exposure and ensure long-term financial security.