How Do Insurance Deductibles Work?

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The deductible clause in an insurance policy is a cost-sharing measure that serves two main purposes. The first is to encourage you to prevent accidents and mishaps that result in losses. The second is to help keep insurance premiums down. Most types of insurance, including home, rent, auto and health insurance, incorporate a number of deductible options in every contract. However, this cost-sharing method works differently according to the type of insurance. Understanding the what and how of deductibles is vital to understanding how your insurance policies work.

Percentage vs. Straight Dollar Amount

  • An insurance deductible is always an out-of-pocket expense. With homeowners insurance, it’s usually a percentage of the total amount of insurance. According to Coastal Insurance Solutions, a two percent deductible is the most common. With renters, auto and health insurance, the deductible is usually a specific dollar amount. In general, the more willing you are to share costs with your insurance company by choosing a higher deductible, the less you pay in monthly premiums.

Per-Claim Deductibles

  • Homeowner, renters and auto insurance deductibles usually apply to every claim with no annual maximum. In most cases, you pay the deductible at the time of service. For example, if the cost to repair your car is $2,000 and you have a $500 deductible, the mechanic will give you a bill for $500 and invoice the insurance company for the remainder. With a $200,000 homeowner policy that has a two percent deductible, your insurance company will deduct $4,000 from every reimbursement, no matter how many occur in the calendar year.

Annual Deductibles

  • Unlike with other types of insurance, health insurance deductibles accumulate throughout the calendar year. You are 100 percent responsible for paying most medical expenses until you meet the deductible limit before your insurance will pay. However, most health insurance plans will pay for preventive care, such as an annual physical exam, screenings and immunizations, without requiring that you first meet the deductible. According to Healthcare.gov, some plans will also pay for regular doctor visits and prescription medication before you fulfill the plan’s deductible requirement.

Deductibles and Your Pocketbook

  • State laws regulate insurance companies and the deductibles they offer. However, companies in most states offer a range of options. According to the Insurance Information Institute, raising your deductible is a good way to save money on the cost of the policy, especially with policies having per-claim deductibles. For example, raising the deductible from $500 to $1000 on a renter’s policy can result in a savings of 20 percent or more on your premium. For auto insurance, raising the deductible from $200 to $500 can decrease premium costs by 15 to 30 percent.

References

  • Photo Credit Curt Ziegler/iStock/Getty Images
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