If you’re thinking of purchasing insurance, you’ve probably come across the term “deductible.”
A deductible is an amount that you, the policyholder, have to pay before your insurance company starts covering your expenses.
It can be confusing to understand how it works, but it’s a crucial aspect of your policy that you should be aware of.
In this article, we’ll explain how insurance deductible works, so you can make informed decisions about your insurance policy.
Insurance is a way of transferring risk from an individual or business to an insurance company.
However, before an insurance company pays for any damages, the policyholder has to meet the deductible.
What is an Insurance Deductible?
An insurance deductible is the amount of money you, the policyholder, have to pay before your insurance company starts covering your expenses.
For example, if you have a $1,000 deductible on your auto insurance policy, and you get into an accident that causes $3,000 in damages, you’ll have to pay the first $1,000, and your insurance company will pay the remaining $2,000.
How Insurance Deductible Works
The deductible is the amount that you are responsible for paying before your insurance coverage kicks in.
It’s the portion of the loss that you have agreed to pay when you signed up for your insurance policy.
When you file a claim, your insurance company will subtract the deductible amount from the total amount of your claim.
The remaining amount will be covered by your insurance company, up to the policy limits.
Types of Insurance Deductibles
There are different types of deductibles that you can choose from when you purchase an insurance policy. Some of the most common types of insurance deductibles are:
1. Specific Dollar Amount Deductible
A specific dollar amount deductible is the most common type of deductible. It’s a fixed amount that you have to pay before your insurance company starts covering your expenses. For example, if you have a $500 deductible, you’ll have to pay $500 before your insurance company starts paying for any expenses.
2. Percentage Deductible
A percentage deductible is a deductible that’s based on a percentage of the total amount of the claim. For example, if you have a $10,000 claim with a 10% deductible, you’ll have to pay $1,000 before your insurance company starts paying for any expenses.
3. Zero Deductible
A zero deductible means that you don’t have to pay anything before your insurance company starts paying for your expenses. However, insurance policies with zero deductibles usually have higher premiums.
How to Choose the Right Deductible for You
Choosing the right deductible can be tricky, but it’s essential to pick the right one for your needs. Here are some factors to consider when choosing the right deductible:
1. Your Budget
Consider how much you can afford to pay out-of-pocket in the event of a loss. If you have a higher deductible, you’ll have to pay more out-of-pocket before your insurance company starts paying for your expenses. Make sure that you choose a deductible that fits within your budget.
2. Your Risk Tolerance
Your risk tolerance is the amount of risk you’re willing to take on. If you have a higher risk tolerance, you may want to choose a higher deductible to lower your monthly premiums.
3. Your Insurance Needs
Consider your insurance needs when choosing your deductible. If you have a high-value property that you want to insure, you may want to choose a lower deductible to ensure that you won’t have to pay so much money out of pocket.