What is a Deductible?

Having adequate insurance coverage is generally viewed as a necessary part of any solid personal financial plan. For example, without sufficient health insurance, a single accident or injury could wipe out years or even decades worth of your savings. Similarly, if you have inadequate homeowners insurance then you could find that you’re unable to completely rebuild after a fire or natural disaster destroys your home. One key element of nearly every insurance policy you consider for yourself is the deductible.

Deductibles Overview. The deductible of any insurance policy is the amount that you’re responsible for paying yourself, out of pocket, before you can make a claim and have your insurance company reimburse you for any covered damage or insurable event. Most insurance policies you’ll buy will include a deductible. One reason for having a deductible is to reduce the administrative and financial burden of a policyholder making a claim to their insurance company for relatively minor damages, because the lower this burden is, the lower the premium costs will be. The most common exception, of course, is life insurance. When a claim is made under a life insurance policy – that is, when the insured individual passes away – the claim is not subject to any deductible.

What to Do About Your Deductibles? The most important thing to realize about your insurance deductibles is that managing your deductibles provides you with one of the best ways to control your insurance costs. For example, when you shop for insurance for a new car, you’re likely to be presented with several different levels of deductibles for your comprehensive and collision coverage. You might find these options to be a zero deductible, $250 deductible, $500 deductible and $1,000. The deductibles for medical payments are likely to range significantly higher. By choosing higher deductibles, you’ll be able to reduce the premiums that you’ll have to pay for coverage. Different insurance companies may compute their deductibles differently, so you’ll need to take these differences into account when comparing your options.

Insurance is one of the few things we buy even though we hope we’ll never have to use it. Make sure you understand your current deductible levels are appropriate for your situation, and whether raising or lowering those deductibles would be more appropriate.