Deductibles are an important part of many insurance policies, influencing how much you pay each month and at the time of a claim. Have you ever found yourself expecting help, only to have insurance ask you to pay instead? If so, a deductible was likely at play. It may seem unfair that you pay every month and still have to pay more when you need help from your insurance, but deductibles allow policies to cover all types of individuals at affordable rates. Today, we will look closer at deductibles, how they work, and why they are such an important part of insurance policies.
What is a Deductible?
Without making it too complicated, a deductible is simply an amount you agree to pay out of pocket before insurance kicks in. Having an insurance plan doesn’t mean you are 100% financially off the hook. If you were, the premiums you pay every month would be too high for the average person. Deductibles are found in all kinds of insurance and are one of the ways different plans can be priced differently.
For instance, if your health insurance policy has a $500 deductible, you must pay the first $500 of your medical expenses before your insurance kicks in. Similarly, in auto insurance, if you have a $300 deductible and incur $1,000 in damages from a covered accident, you would pay $300, and your insurance would cover the remaining $700. Deductibles share the cost risk between the insurer and the insured, influencing your out-of-pocket expenses and how you manage your policy.
Types of Deductibles
The two primary types are flat-rate and percentage-based deductibles. A flat-rate deductible is a fixed amount, such as $500 or $1,000, that applies to each claim or policy term. This type is common in auto and health insurance policies. On the other hand, percentage-based deductibles are often used in policies covering properties, like homeowners or flood insurance. They are calculated as a percentage of the home’s insured value. For example, if your home is insured for $200,000 with a 1% deductible, you would be responsible for the first $2,000 of a covered loss.
Additionally, policies may specify annual deductibles, which only need to be met once per year, or per-claim deductibles, which apply to each claim separately. The cost difference between an annual vs per-claim deductible can be enormous if multiple expensive accidents or claims happen within one calendar year.
Which Deductible Type Is Best?
Selecting an appropriate deductible is a balancing act between manageable premium costs and affordable out-of-pocket expenses in the event of a claim. Higher deductibles go hand in hand with lower monthly premiums because you assume more financial responsibility. On the other hand, a lower deductible leaves you with higher premiums – but less financial strain when accessing services or filing a claim.
Assess your financial stability, risk exposure, and how frequently you anticipate filing claims to determine the right deductible. A higher deductible might be favorable for individuals with a solid emergency fund and a desire to minimize monthly expenses. However, if unexpected out-of-pocket expenses would be financially burdensome, a lower deductible could be the safer choice, even if the monthly cost is higher.
Relationship Between Deductibles and Quality
A common question among insurance policyholders is whether the price of a deductible influences the quality of insurance coverage or care received. The deductible amount does not directly affect the quality or scope of coverage an insurance policy provides. Instead, deductibles are a cost-sharing mechanism designed to distribute financial risk between the insurer and the insured. The primary function of a deductible is to mitigate the insurer’s exposure to small claims, encouraging policyholders to be more mindful of their insurance usage.
For example, health insurance policies with higher deductibles still provide access to the same network of healthcare providers and treatments as those with lower deductibles. The difference lies in the policyholder’s out-of-pocket cost before reaching the deductible.
Every type of insurance has different considerations when choosing a deductible. To find the best plan for health, car, or home insurance, contact Anderson & Associates Insurance Group today.
