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What is an insurance deductible?

What does an insurance deductible on an insurance policy mean?

We all see the insurance deductibles on our home insurance or auto insurance policies.  But do you know what the insurance deductible means for you?

Definition of Insurance Deductible

Simply put, the insurance deductible is the amount of money that you will pay out of pocket if you make a claim on your insurance policy.

For example: You have a $500 collision deductible on your auto insurance.  You get into an accident where you strike a guard rail.  When the insurance adjuster inspects your vehicle, they conclude that there is $2,500 in damages.  The insurance company will pay $2,000 and you would be responsible for $500 as your deductible.

Why are deductibles necessary?

Insurance is meant to protect against major financial loss.  An insurance policy is not designed to pay for small claims or losses.  So a deductible is put in place to act as a self retention limit so the smaller claims are not handled by the insurance companies.  It acts as a way for the policy holder to have “skin in the game” and share the cost of a claim.

The higher your deductible, the more skin you have in the game.  Because of this, the insurance premiums paid for a higher deductible are less than the premiums paid for a lower deductible.

Because the deductible amount affects the amount you pay for insurance, you have to be diligent when shopping for the best insurance plan for your family.  Some insurance companies and agents make promises to save you money on your premiums if you switch to them.  But sometimes, their policies will contain a much higher deductible in order to deliver on the promised savings.  Doing this can make your total cost of insurance much higher in the long run.

What are the best deductible amounts?

The best deductible amounts will vary from person to person.

Some questions to ask yourself when deciding on the deductible amounts are:

  • How much risk are you willing to assume in the event of a claim? If your risk tolerance is high, you may be willing to take on a higher deductible than someone with a lower risk tolerance.
  • Do you have enough money saved up to cover the cost of the deductible? Think about this one hard.  If you are in an accident, do you have enough money in the bank to cover your car insurance deductible?  If you do not, the body shop may not release your car to you until you pay them your deductible.  You do not want to be in a position to no be able to pay for your car repairs.
  • Is the premium savings for the higher deductible worth the potential cost of the higher deductible?  If increasing your deductible by $1,000 only saves you $50 per year, is it worth it?  If it saves you $500 per year, is it worth it?  For a $50 per year savings, it may not be. But for $500 per year, it definitely could be.

Common deductible levels

The insurance world likes to work off of standards.  So there are the so called standard deductible amounts that most insurance companies make available to their customers.

Auto Insurance Deductibles

  • Comprehensive Coverage (Other Than Collision Coverage) Deductibles:  The comp deductibles are usually available in the following levels:  $100, $250, $500, $750, $1,000, $1,500 and $2,000.  Most companies also offer a separate reduced glass deductible to go along with the comprehensive coverage.  Some go as far as offering “full” glass coverage.  This means, that even though you may choose a $500 comprehensive deductible, if the comp claim is a glass only claim, you will have no deductible to pay to repair or replace the glass for your car.  All of the other comprehensive claims would be subject to the regular chosen deductible.
  • Collision Coverage Deductibles: Collision deductible amounts are available in similar amounts to the comprehensive coverage.  $100, $250, $500, $750, $1,000, $1,500, $2,000 and $2,500.  Some go higher, but most lenders will not allow a deductible higher than $2,500.
  • Uninsured Motorist Property Damage Deductible:  In Maryland and some other states, there is a deductible for uninsured motorist property damage coverage.  The amount is set by the Maryland legislature and is currently set at $250.  So if your car is damaged by an uninsured driver, including by a hit and run driver, you will have to pay a $250 deductible to have it repaired under the uninsured motorist coverage.  For uninsured motorist to apply, you will also have to file a police report for the claim.   The deductible and police report are put in place to help combat insurance fraud and filing of false claims.

Home Insurance Deductibles

For most homeowners insurance policies, one deductible is selected.  The most common deductible for home insurance policies currently is $1,000.  There may be some home insurance policies that still have a $250 or $500 deductible.  These are usually older policies that have been in force for over 5 years.  Most insurance companies will not go below $1,000 for a home insurance deductible when writing a new policy.

The home insurance deductible can also be available with the following options:

  • $1,000
  • $1,500
  • $2,500
  • $5,000
  • 1% of Coverage A
  • 3% of Coverage A
  • 5% of Coverage A

If you have enough money to cover the deductible, you may choose to go with the higher deductible.  One thing to remember is that the deductible applies to each claim that you may have and is not an annual deductible.  So if you have more than on claim, the deductible will apply every time.  That can add up and eat into any potential savings that you may have had with the higher deductible.

Something to note is that the percentage deductibles are calculated by using the coverage A limit on the policy.  Some people get confused and think that the percentage deductible is calculated based on the amount of the claim or loss sustained.  For example, if you have coverage A at $500,000 with a 5% deductible,  your deductible amount would be $25,000.  So if you suffered a claim on your home for $50,000, you would be responsible for $25,000 and the company would pay the other $25,000.

So some companies or agents may try to sell you on these percentage deductibles by stating that you would not file a small claim, so why not increase the deductible to save money.  But a percentage deductible can greatly increase your total cost of insurance.

What is a named storm, hurricane or wind/hale deductible?

I stated earlier, that there is usually only one deductible on a home insurance policy.  There are companies that do have a second type of deductible that they add  to their policies.  They can add a named storm deductible or a wind/hale deductible.

These deductibles are usually higher than the normal deductible chosen on the home insurance policy.  For example, you can have a $1,000 deductible with a 2% wind/hale deductible.

This type of deductible would be triggered by the event in which it applies.  So in the above example, a fire would be subject to the $1,000 deductible.  But if there was a severe wind and or hail storm, the deductible for that claim would be 2% of the coverage A value on the policy.

When shopping your insurance, this is another area that you need to pay attention to.  Having these special deductibles can make a home insurance policy look less expensive.  But it can also increase your total cost of insurance if a storm blows through your neighborhood.   You want to know what your deductibles are before you have to worry about replacing your roof or siding after a storm.

Contact Huff Insurance Today

Huff Insurance works with our clients to get the best insurance plan for their needs.  This includes talking about coverage and deductible options.  This is done to make sure that your insurance plan is the best one for your needs.

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