Are you on the lookout for homeowners, auto, or health insurance? If so, you might have come across the term deductibles and might be intending to understand how they work. Insurance deductibles are prevalent in health insurance, casualty insurance, and property insurance products. In simple terms, the deductible is the out-of-pocket expense that you have to bear before the insurance coverage starts and pays for your claims.
The coverage amount, the amount paid in premium, and the insurer dictate the value of deductibles, and they are typically variable. However, the general rule is that the premium you pay monthly or annually will be low if the deductible is high. It is because you are liable to bear a more significant cost before your coverage kicks in. In contrast, if the premium is high, the deductibles are low. Hence, the insurance plan kicks in faster.
This guide will first discuss why insurance policies have deductibles and then on how they work.
1. Why do insurance policies have deductibles?
Insurance companies can share the cost with the policyholders via deductibles before they make claims. However, this is not the only reason insurance companies charge deductibles. There are two other reasons for the same, including the following:
- Moral hazards
Deductibles are an excellent way to mitigate behavioral risks around moral hazards. The key aim of the insurance policy is to shield the policyholder against losses. However, there is always a latent moral hazard involved, wherein a policyholder might not act in good faith. Thus, a deductible will lower the risk as the policyholder finds himself responsible for a part of the cost.
- Financial stability
Deductibles are also a measure of assurance of financial stability for the insurance policies, as they lower the gravity of the claims. Thus, a deductible works like a cushion between a genuinely catastrophic loss and a minimal loss.
2. How do deductibles work?
- Homeowners insurance deductible
Your deductible will decide the stake. The deductible can either be in the form of a percentage or a dollar amount. In the case of the former, you will pay a certain percentage of the insured value in every claim. This percentage is typically two percent. However, before you agree on percentage deductible, there are a few things you must know:
- They are usually demanded in times of a natural disaster like hail, earthquake, and storm.
- At times, even a tiny percentage might result in a significant expense.
- When there is a rise in the home’s insured value, the deductible will also increase.
On the other hand, in the case of dollar deductibles, the deductible is applicable on every single claim. So, it will be reduced from the amount the insurance company pays you when you file a claim. Generally, the deductible amount is between $500-$2000. So, if the deductible amount is high, your monthly or annual premium will be low, but your out-of-pocket expenses will increase when filing a claim.
Before deciding from among these two deductibles, you need to ascertain that you will be in a position to pay for the deductible when there is a claim.
Health insurance deductible
This is the insurance deductible, which you pay for the policy before the company provides you with your claims. However, you must know that reaching the annual deductible does not necessarily imply the end of the out-of-pocket expenses to be borne by you. You will still be liable to pay any health insurance coinsurance or copayments on the covered service. Generally speaking, the insurance plans will have an upper cap on out-of-pocket expenses. This will limit the total amount you will have to bear for the medical expense before the entire cost is covered.
If you take a family health insurance, they will have a smaller and a separate deductible for all the individual family members and a larger, combined deductible for the whole family. The policy, having these plans in place, will pay for your covered claims in the below-listed situations:
- The combined total expense of the entire family meets the family deductible
In this case, every family member is covered wholly, irrespective of whether they have reached their deductible.
- An individual meets their personal deductible
In this case, the expenses of the individuals will only be covered.
Car insurance deductible
There is only a chunk of the auto insurance, which carries a deductible. Depending on your condition, other coverages might be available, sans any deductible. For instance, liability car insurance needs no deductible. In this case, the policy will pay for the damage inflicted on others and not pay for your car or what you suffered.
So, after you file for a claim, the policy provider will ascertain the covered amount. From this amount, the deductible will be reduced, and you will get the difference. A similar process is applicable for every new claim. Hence, you will have to bear the deductible cost each time.
Different kinds of coverage, such as collision insurance or comprehensive insurance, have their deductible. A few car insurance policy providers might also provide for a vanishing or a disappearing deductible program. As per this scheme, the deductible amount is reduced by a fixed amount every year without a claim.
Renters insurance deductible
Since your insurance policy only offers coverage to you and your belongings and not the building’s physical structure, the renters’ insurance deductible will always be the dollar amount. So, it will be a flat amount to be paid. For instance, in some cases, the deductible is not applicable for a certain valuable item that you have included in your policy or for a liability claim.
In this case, the insurance quotes are less than that in the homeowner’s insurance. Hence, the monthly premium is low. Consequently, the deductible will be high.
Life insurance deductible
This is quite straightforward. In life insurance policies, there are no deductibles. Hence, anytime there is a claim on the policy, for instance, when an insured individual is dead, the insurance company will provide the full benefit, sans any reduction in the name of the deductible.