Know how your deductibles work to prevent surprise costs.
Many of us know that we need insurance, from car insurance to homeowners insurance to health insurance. However, do we really understand what we’re buying? A large part of what makes or breaks our finances is the insurance deductible. The deductible is the amount of money you will pay in an insurance claim before the insurance coverage starts paying for you. Too high and we face financial strain before our insurance kicks in, and too low can mean that we pay more every month in premiums.
How Deductibles Work
For dollar amount deductibles, a specific amount of money would come off the top of your claim payment. For example, if your policy states a $1,000 deductible, and your insurer has determined that you have an insured loss worth $10,000, you would receive a claims check for $9,000. Typically, percentage deductibles only apply to homeowners policies and are calculated based on a percentage of the home’s insured value.
With auto insurance and a homeowners insurance policy, the deductible applies each time you file a claim. In addition, deductibles generally apply to property damage, not to the liability portion of homeowners or auto insurance policies.
Choosing the Right Deductible
The higher the deductible, the lower the cost of insurance. Conversely, the lower the deductible, the higher the cost of insurance. Choosing the right deductible will be different for everyone’s financial picture. For example, for those living without separate savings for a large deductible, it may make more sense to select a lower deductible so that the unexpected out-of-pocket cost is lower. You may find that the difference between a high deductible and low deductible is only a matter of a couple of hundred dollars, and you’d rather make that immediate saving by selecting a higher deductible for a lower monthly premium.
Not only will this relationship between deductibles and premiums differ based on insurance type, but it may differ based upon other factors, such as your age and value of your car, for example.
When shopping for insurance, you should always ask your insurance agent what the premium costs are at each of the available deductible levels. Knowing that information may help you make a sound decision regarding your coverage.