Insurance Questions: What Is A Deductible?
With insurance, the size of your deductible determines how much money you’ll get paid after an accident; and, how much you’ll pay for coverage. Learn more about deductibles and how you can pick the right-sized deductible for your needs.
What Is An Insurance Deductible?
A deductible is the cash amount that an insurance company holds back when a customer files an insurance claim.
Here’s how deductibles work.
Imagine your car is damaged in a storm. Its hood got crushed by a falling tree. You get an estimate from a car repair shop and are told that repairs will cost $1,000.
So, you file an insurance claim.
Your insurance company accepts your claim for the repairs to your car and tells you that cash is on its way.
- The insurance company pays you $750 cash if your deductible is $250
- The insurance company pays you $500 cash if your deductible is $500
- The insurance company pays you nothing if your deductible is $1,000
So, the smaller your deductible, the more cash you get from your insurance company when something goes wrong.
As a customer of the insurance company, it’s up to you how small or how big you want your deductible to be. The size of your deductible, though, is linked to the cost of your insurance.
The smaller your deductible, the more you’ll pay to be insured.
Why Do Insurance Companies Use Deductibles?
There are two main reasons why insurance companies put deductibles on their policies.
The first reason is to make sure that people with insurance don’t do dumb things just because they’re insured. This includes leaving a car parked on the street, with keys in plain sight; or, leaving the doors to a home unlocked while away on vacation.
Because there’s a deductible, the person with insurance has “skin in the game” should something go wrong. It’s not just the insurance company that’s paying for the losses and damage; the person who left their car keys in sight, or their doors unlocked, has money at stake, too.
Deductibles keep people from behaving recklessly.
Save Money By Changing Your Deductible
The second reason deductibles exist is to keep people from filing an insurance claim after every low-value loss.
For example, let’s say you’re driving your car and a stray rock bounces up from the road. The rock hits the hood of your car and chips its paint. You don’t like the way the paint chip looks so you take the car to a body shop where they tell you it’ll be $10 to make the repair.
With no deductible on your insurance policy, you’d file a $10 claim with your auto insurance company which would, in turn, do an investigation on your claim (which costs money), process your claim (which costs money), and send you a check for ten dollars (which costs money).
By having deductibles in place, insurance companies can keep their costs down which, in turn, lowers insurance costs for everyone.
How Big Should My Deductible Be?
When you’re shopping for insurance, it’s your choice how small or how big your deductible will be.
The most common options for a deductible are $250, $500, and $1,000; but other options are available, too. The smaller your deductible, the more your insurance will cost.
So, which is going to be best: going with a small deductible or a high deductible? The answers depend on your money situation.
Here’s a quick guide to help you make a choice.
$250 Deductible: When you live paycheck-to-paycheck and don’t have much savings
The advantage of choosing a $250 deductible is that out-of-pocket costs are capped at $250 when something goes wrong in your life. If your car breaks down; your home gets damaged; your laptop is stolen; or, anything else, insurance will pay for everything to be fixed, minus the $250 that’s your deductible.
The $250 deductible is good for people who have little or no money left at the end of a month, and whose bank accounts aren’t as big as they’d like.
The trade-off of having a small deductible is a higher cost for your insurance.
You might pay 20% more for an insurance plan with a small deductible as compared to a large one; and, paying more for insurance makes it harder to meet your savings goals.
That’s why the smallest insurance deductible option isn’t always what’s best. If you can afford to pay more than $250 out-of-pocket after an accident, choose a higher deductible amount.
Update Your Insurance Deductible Now
$500 Deductible: When you’re getting by, and have some money saved up
When you choose the $500 deductible option on your insurance, your insurance company will cap your out-of-pocket costs after an accident at $500.
If your car is hit at an intersection; your roof is damaged in a storm; or, a person is injured in your home, as examples, your insurance will pay for your damages in full, minus your $500 deductible.
The $500 deductible is good for people who are getting by and who have at least some money in the bank, either sitting in an emergency fund or saved up for something else.
The benefit of taking a higher deductible is that it’s cheaper to be insured. Your deductible should be as high as you can reasonably afford.
$1,000 Deductible: When you’re living comfortably, and feel good about your savings
Choosing the $1,000 deductible option limits your out-of-pocket costs after an insurance claim to $1,000.
If your car is damaged in a hit-and-run; your jewelry is stolen from your home; or, your dog bites a person on your property, as examples, your insurance will pay for the cost of damages in full, minus your $1,000 deductible.
The $1,000 deductible is good for people who earn a good income and who have sufficient savings to handle unexpected events, such as car accidents or the theft of valuables.
A deductible of this size lowers your insurance costs considerably.
A note of caution, though: don’t take a $1,000 deductible just for cheap insurance. You shouldn’t take a $1,000 deductible unless you have at least $1,000 of money saved in the bank and, hopefully, a lot more.
If you take a $1,000 deductible and then you have an accident, you risk getting too little money from insurance in order to make your repairs. Imagine having a hole in your roof for weeks on end because you don’t have enough money to pay for your deductible.
Take the biggest deductible you can reasonably afford. If it’s $1,000, that’s fine. If it’s something smaller, that’s fine, too.
Shopping For Cheaper Insurance
The cost of your insurance will depend on the size of your deductible. The larger your deductible, the less you’ll pay for insurance.
Shop your insurance quotes around. Get three different quotes at least. Insurance companies offer different options for your deductible, and some offer bigger discounts than others.
Get quotes from at least three different insurance companies to make sure you’re getting your best, cheapest insurance.