When looking for auto, home, or health insurance, you may wonder what is an insurance deductible and why do policies have them? Before defining and explaining why policies have this component called a deductible, it should be understood that they are a necessary part of an insurance contract. Deductibles help both individuals and businesses maximize their insurance policies and reduce risks.
An insurance deductible is the amount the policyholder must pay for policy related services per claim before their insurance plan begins to pay. There are two basic types of deductibles, depending on the type of policy at issue. The first type is a “standard deductible,” which is a specific dollar amount (for example, $500) that the policy owner must pay on a claim before the insurance begins to pay. Standard deductibles can be found in most types of insurance policies. The second type, called a “percentage deductible” is generally associated with homeowners’ insurance – with some policies, the homeowner can choose between having a standard or percentage deductible. The percentage deductible is based on a percentage (for instance, 2%) of the policy limit that the policy owner must pay on a claim before the insurance begins to pay. Depending on the policy and the circumstances, you may have more than one deductible that you are responsible for. When selecting your policy, you can typically choose from a preset range of deductibles that the insurance company has authorized. There are pros and cons to choosing a lower deductible versus a higher deductible, and vice versa. Choosing a lower deductible may mean that you won’t have to pay as much of your own money towards a covered claim, but it may also mean that your premiums are more expensive. Conversely, you may be able to save some money on your premiums by selecting a higher deductible, but it could also mean that you will have to pay more out of pocket before your insurance kicks on a covered claim. When selecting the deductible amount, consider both your budget and your level of risk tolerance. Don’t hesitate to contact our experienced agents to discuss your options in this regard.
As mentioned previously, deductibles are a set amount that the insured must pay before the insurance carrier is required to begin to pay towards an insurance claim. A common misconception is that the deductible or “out of pocket” cost goes to the insurance company, when in fact this expense is paid directly towards the claim, in the form of repairs, medical tests, and other costs resulting from a variety of claims.
Insurance policies have deductibles as a way of sharing the risk between both parties, those being the insured and the insurer. Deductibles help to encourage both the policy holder and insurer to avoid and mitigate loss.
Health Insurance Deductible
A health insurance deductible is the amount the policyholder must pay before the health insurance company begins to pay towards covered claims. Although similar to other deductibles, health insurance deductibles sometimes differ in that some policies, depending on the plan, may require you to satisfy your full deductible before copays and coinsurance begin to apply.
Coinsurance is the fixed percentage that you pay for covered services after you meet your deductible.
A co-pay is a flat fee that you pay each time you receive a medical service or fill a medication. For example, you may have a set copay that you have to pay each time you fill a prescription.
You can find more employee benefits definitions here.
Deductibles in homeowners insurance are only applicable in claims where there is property damage to your own home. Liability claims for covered events involving people who suffered personal injury (for instance, your guest is bitten by your dog or trips and falls down your stairs) or property damage (for instance, your tree falls on your neighbor’s car) occurring on your property don’t require you to pay a deductible before coverage takes effect. When selecting your homeowners policy, you often have the ability to choose between a standard deductible or a percentage deductible.
Similar to a deductible for homeowners insurance, an auto insurance deductible excludes liability claims and is only necessary if there is damage to the policyholder’s vehicle. The major difference between an auto and homeowners insurance deductible is that there is no option for a percentage deductible.
Typically, your deductible will affect your premium, which is the cost you pay for your policy either monthly or yearly depending on your coverages details. Typically, the higher the deductible the lower the premium, as it translates to taking greater responsibility for the costs if a claim is filed. You may be able to save money on your premium by increasing your deductible. However, as you will ultimately be responsible for paying your deductible out of your own pocket before your insurance begins to pay, be sure that you select a deductible amount that you could realistically afford to pay in the event of a catastrophic loss.
Understanding insurance deductibles can be difficult and confusing at times. Our local insurance agency works with 100 different carriers, from New England based companies, to national names. We can work with you to show you insurance coverage options for you. To find out more, contact your local Cross Insurance today.
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