If you’ve ever had an auto accident or a homeowner’s claim, you have likely talked about your deductible. A deductible is the amount that is “deducted” or subtracted from the overall loss amount. So theoretically, if you have an auto claim where your vehicle suffers $1,500 worth of damage and you have a $500 deductible, the insurance company pays $1,000 of the claim where you, the policyholder, would cover the other $500 (satisfying the deductible amount).
Now that we know what a deductible is, let’s talk about why it even exists. What is the point of a deductible? The reality is a deductible helps you as well as the insurance company. When a claim occurs and a deductible applies, both parties are sharing the risk for that particular loss. The insurance company often promises to pay for the bulk of the loss, where you agree to pay for a stated amount toward the loss, an amount that you’ve chosen because you feel you can afford to pay that amount out-of-pocket when a loss occurs. This obviously helps the insurance company because they do not have to pay as much for the claim. At the same time, it helps keep your overall insurance rates lower since the insurance company is not paying as much for the claim. In addition, if you choose to take on a higher deductible, it will help lower the overall insurance rates you are charged during that policy period.
If we take this idea and apply it over millions of policyholders, it helps keep the overall claim expenditure lower and thus helps keep insurance affordable for the customer.
One thing to remember when talking about deductibles is a deductible only applies when using first-party coverage. First-party coverage is the coverage that takes care of the damages to your own vehicle, not someone else’s vehicle. There are generally no deductibles for the liability coverage on your auto or homeowners policy. That is paid by the insurance company based on the stipulations in the policy.
The deductible stipulation can look a little different depending on what state you live in and what insurance company you have. Some deductibles are a stated amount you agree to when the application begins such as $500 or $1,000. Other deductibles are on a percentage basis where you agree to pay a percentage of the amount of insurance on the property for your deductible. This is most often seen with homeowner’s policies. Let’s say you insure your home for $100,000 and you have a 1 percent deductible, you are agreeing to pay $1,000 as your deductible amount.
Property damage deductibles generally apply per occurrence, or every time a claim is filed. This means that if you have three accidents in one policy period and a $1,000 deductible applies on each claim, you would have to pay $1,000 on each separate occasion. This is different from most health insurance policies where there is an annual deductible that you pay. Once that amount is reached, the insurance company would pay for the additional amount for the remainder of the year.
I hope this explanation of deductibles inside the insurance world was helpful. If you have questions about your deductible, consult with your independent insurance agent!