Understanding what a deductible is in insurance is perhaps one of the most critical aspects of understanding the out-of-pocket finances associated when you make a claim. Maybe you got in a car accident or experienced damage to your house, and you file a claim. Now what?
When you create a claim, you are notifying your insurance agency that you believe your policy may warrant some degree of compensation, such as covering some of the costs of your damaged insured item. An insurance adjuster will determine what the insurance agency owes you for your losses.
Deductibles & Premiums
A deductible, in its simplest definition, is how much you will pay out-of-pocket when you file a claim. For each insurance policy, deductible amounts vary greatly. Higher deductibles allow you to receive a lower premium. A premium is an amount you pay monthly for your insurance policy. With a lower deductible, you can expect a higher monthly premium and fewer out-of-pocket expenses.
Most insurance policies have deductibles and expect you to pay for your deductible first before they pay the rest of what you may owe.
Example: If you file a claim that is 25,000 dollars worth of damage and have a 2,000 dollar deductible, you need to pay the 2,000 before the insurance company pays the other 23,000.
So, which is better? A lower or higher deductible?
Well, whether you choose to have higher or lower deductibles is based on your personal preference for financial risk.
As we have touched upon, having a higher deductible means you will pay less for your premium. Higher deductibles are a good choice when you have a history of filing very few claims and if you want to save money on your premium.
Ensuring you have the funds to pay a high deductible is pertinent when choosing a deductible. At any given point, an accident may transpire, and if you lack the funds to pay your high deductible, there are serious implications. The inability to afford your deductible means you will increase the likelihood that repairs will not begin right away.
Example: Your car is totaled, you make a claim, but you can not afford the deductible. Your auto insurance policy explicitly states you are entitled to a car rental for X amount of days. Eventually, the allotted days for a car rental pass, yet you still have not paid your deductible. You are left with neither a rental car nor a vehicle because of your inability to afford the deductible.
Lower deductibles will be a less out-of-pocket cost for you but will make your premiums higher. If you find yourself filing numerous claims in short periods, it may be wise to choose a lower deductible. Lower deductibles will give you maximum protection from major expenses tarnishing your wallet if you do not have the funds present. Although you will pay higher monthly premiums, at least you will be better prepared to handle out-of-pocket costs.
Key Takeaways
Choosing the highest deductible and the lowest premium may help you cut corners, but you could be exposing yourself to too high of financial risk. Choosing a lower deductible and a higher premium can ensure you are safe if major damage transpires, but if it is unlikely to occur, you could be paying too much. Weighing out your or your business’s personal needs will help you decide on which option is most appropriate. Making the choice all comes down to how willing you are to take a financial risk. Weigh your options and be honest with yourself when deciding the best fit.
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