What is an Insurance Deductible?

By Dawn Klintworth

Deductibles are an important part of your home and car insurance policies. When you have an insurance claim, your deductible is the amount of money you would pay for repairs to your home or car before your insurance would start paying. 

How does a deductible work? 

When you buy an insurance policy, you’ll select a deductible amount that you are financially comfortable  with. Your insurance company will use this amount to set your premium.

Then, if something happens to your home or car that’s covered by your policy, you’ll file an insurance claim. Once your claim is approved, your insurance company will take your deductible amount out of the total payout of your claim. 

These examples illustrate how a deductible would apply to a claim.

Car insurance deductible example*

Consider what would happen if you set a $500 deductible on your car insurance and you cause an accident that results in $5,000 in damage to your car. You would be responsible for paying your deductible, that first $500. Then the insurance company would cover the remaining $4,500. 

Home insurance deductible example*

If you have a house fire that causes $25,000 in damage to your home, including the actual damage caused by the fire, smoke damage, and water damage from the efforts to put out the fire. If you have a $1,000 deductible on your home insurance , you’d pay that deductible with the insurance company covering $24,000, assuming the claim was within policy limits. 

How do deductibles affect my rates?

What you choose for your insurance deductible will impact the premium you pay for your insurance policy. In general, if you choose a higher deductible, you will have a lower premium, while a lower deductible will result in a higher premium. 

This is true because having a higher deductible will shift more of the financial responsibility for a claim from the insurance company to you, reducing the insurer's risk and lowering their cost. If you have a high deductible and have a minor car accident or minimal damage to your home from a storm, you may not even have enough damage to file a claim. Because you’ll be covering more of the cost of a claim, your regular insurance premium would be lower. 

How do I set my deductible? 

Most standard home insurance use dollar-amount deductibles. You’ll select a specific dollar amount that you’re comfortable paying out of pocket if you have a claim. When you’re selecting your deductible, some factors to consider include:

What’s best for your budget

Selecting a higher deductible could reduce your regular insurance payments. 

How much risk you’re willing to take

While a higher deductible will typically result in a lower premium, you’ll be responsible for paying more out of pocket if you have a claim. You need to make sure you’re prepared to cover that cost if you have a claim.

Do deductibles work the same for all types of insurance claims?

Some coverage could have a different type of deductible than your standard home insurance policy deductible. For example, earthquake coverage  has a percentage deductible. And that deductible applies separately to each coverage impacted. Note: Earthquake coverage is optional and not automatically included in your policy.

Here’s how earthquake deductibles apply when there is  damage caused by an earthquake to the structure of your home and your personal property. 

Earthquake deductibles for dwelling coverage

If your earthquake deductible is 5% and an earthquake damages your house, your deductible would be 5% of the dwelling insurance coverage you have. If your coverage was $200,000 on your home, your deductible* for your home structure (dwelling) would be $10,000. ($200,000 x .05)

Earthquake deductible for personal property coverage

If the earthquake also damages your personal property in your home, you’d be covered, but you’d have to pay the deductible on that coverage as well. If you have $100,000 in Personal Property coverage, you’d owe a $5,000 deductible* on that part of the claim. ($100,000 x .05)  

Even though it’s one earthquake (one occurrence), as the policyholder you would pay both deductibles, which could result in a large expense on an earthquake claim. Still, that deductible would be significantly less than paying the entire cost to repair or rebuild your home following an earthquake.

Why do I have to pay a deductible?

Insurance deductibles play an important part in how insurance works and how companies can keep insurance affordable. 

Deductibles control insurance costs

Insurance deductibles reduce the number of small claims insurance companies must pay and process. Sharing the risk for those smaller claims helps control insurance costs and make rates more affordable for policyholders.

Deductibles encourage responsible behavior

Insurance deductibles encourage people to be more responsible with their home and car. If the first cost of an insurance claim is the policyholder's responsibility, it makes sense that they would drive more safely or take more caution to avoid insurance claims.  

Deductibles help prevent fraud

Most policyholders buy insurance for the right reasons, to protect their financial investment in their home and car. However, according to the Coalition Against Insurance Fraud, insurance fraud costs the U.S. $308.6 billion (about $950 per person in the US) annually.

If insurance policies didn’t have a deductible, policyholders would receive the full amount of the claim from the insurance company. They wouldn’t have a financial stake to deter fraudulent claims which would likely lead to more fraud in auto and home insurance claims. When fraud increases, the cost of insurance increases. 

Set the right insurance deductible

Home and car insurance are an important part of your financial plan, providing protection for your home and belongings and your car. By understanding how insurance deductibles work, you’ll be better prepared to make important decisions about your coverage. 

Talk with your insurance agent to choose the right deductible for your home and auto insurance needs. 

Start an insurance quote

Get a home insurance quote and auto insurance quote today. Or contact your local insurance agent to discuss all your insurance needs. From coverages, limits, deductibles and discounts, your agent can make sure you get the insurance you need at a price you deserve.

 

Updated 5-30-23