One of my Facebook friends recently posted the following status: “We have to pay our $500 deductible again. Is this normal or should I look into a new insurance company? I do not feel it is fair because it’s not like you can avoid hitting a deer.” After reading through the 50 comments this post generated, I realized that most people view insurance as, as one person commented, annoying.

Why do people think insurance is annoying?  Is it because it’s confusing? I agree that insurance can be confusing, even for someone who works in the insurance industry. For the general public, deductibles and how they work can be a hard topic to get your head around.

Wikipedia defines a deductible as the amount of expenses that must be paid out of pocket before an insurer will pay any expenses. Most home and auto insurance policy deductibles are applied per incident (in my friend’s example, every time she hits a deer) because this type of insurance operates on the assumption you will typically not have a loss. Really, how many of us plan to have an accident?  Health insurance, on the other hand, is insurance that you almost always will use every year so an annual deductible makes more sense. Could you imagine paying a deductible every time you visited the doctor?

To complicate the topic of deductibles even more, your insurance policy may have multiple deductibles which apply based on what caused your loss.  For example, your homeowners policy may have an “All Perils” deductible of $1,000, Earthquake deductible of 5 percent (if your policy carries an earthquake coverage endorsement), and a Wind and Hail deductible of $2,000.  The cause of loss will dictate which deductible you will have to pay. If your roof becomes damaged because of a hail storm, you would be subject to the $2,000 Wind and Hail deductible, but if you suffered a loss due to an Earthquake, you would be responsible for a deductible that totals 5 percent of the amount of insurance you have covering your home.  For example, if your home was insured for $100,000, you would be responsible for the first $5,000 of the loss.

A deductible is used as motivation for you to protect your property and prevent damage from occurring in the first place. Typically, the higher your deductible, the lower your insurance premium.  Talk to your insurance agent to find out what your current deductible is, and discuss any questions you may have surrounding the amount you’ll be responsible for in the event of a loss, or multiple losses, throughout the year.