Understanding what an insurance deductible is and how it works is extremely important to be able to get the most out of a policy.
This is a concept that is present in all insurance contracts and is an essential part of this asset. So that you do not have to cover unexpected costs due to ignorance and can save money, we are going to explain in depth what the insurance deductible is and how it works.
What is the insurance deductible?
An insurance deductible is the amount of money you have to pay for an insured loss. When an accident or any other unfortunate event occurs, the deductible amount is subtracted from your claim payment.
It is the method used by insurers to share risk with policyholders. And, in most scenarios and insurance companies, the higher the deductible, the lower the premium payment for an insurance policy.
How the insurance deductible works
You’ve probably heard that coverage doesn’t start until the insurance deductible is paid. The reality is that you do not have to “pay” a deductible to the company that insures you, but rather you pay for repairs or, in the case of health insurance, medical care for the amount of the deductible before the insurer pays the rest.
An insurance deductible can be a specific amount or a percentage of the total insurance amount on a policy. This amount is determined and established in the insurance contract.
For specific dollar deductibles, it works as follows:
If your policy establishes a deductible of $500 and the insurer determines that the insured loss has a value of $10,000, you will receive a claim check for $9,500 USD. This is the most common insurance deductible.
Percentage deductibles only apply to homeowner’s policies and are calculated based on the percentage of the insured value of the home.
For example, if your home is insured for $200,000 and your insurance policy has a 2 percent deductible, $2,000 will be subtracted from any claim payment.
For auto or homeowners policies, an insurance deductible is charged each time a claim is filed.
The value of the insurance deductible varies depending on the coverage, the insurer, and the cost of the premium. The general rule is that if the deductible is high, you will pay lower premiums because you are responsible for more costs before coverage begins.
Why does insurance come with a deductible?
The main reason insurance includes a deductible is to share costs between insurers when claims are made, but there are other reasons why companies establish deductibles in insurance.
1. Moral risks
The insurance deductible helps reduce the behavioral risk of moral hazards, which refers to the risk that an insured does not act in good faith.
Policies, by protecting policyholders and beneficiaries from loss, involve an inherent moral hazard: that policyholders engage in risky behavior knowing they do not have to suffer the financial consequences.
For example, a person with health insurance may feel free to take unnecessary risks and practice extreme sports without protection or recklessness, because they are insured against damage and accidents.
An insurance deductible mitigates this risk because the policyholder is responsible for a portion of the expenses. This way, the interests of the insurance company and the insured are safeguarded.
2. For financial stability
Another key function of deductibles in insurance is to guarantee the financial stability of the insurer by reducing the severity of claims and their economic impact.
If there were no deductible, the entire cost of claims, regardless of their value, would be borne by the insurance company and there would be an overwhelming number of claims, increasing the financial costs of the policy.
It would also be extremely difficult, if not impossible, for the insurer to respond adequately to the losses or needs of the insured.
Is it better to have a high or low insurance deductible?
The insurance deductible can vary greatly, depending on the plan you contract. It is very important that you give yourself the time necessary to compare the options because although at first glance it may seem that a higher deductible is not a good idea, it can be compensated with cost sharing or lower premiums.
The general rule is that the higher the deductible, the lower the cost of premiums. Also, consider that there are plans that have no deductible (they are zero deductible) and these usually have higher premiums.
There is no correct answer here. You just have to keep in mind that a low deductible implies a higher cost of insurance, while a high deductible lowers the cost of insurance, but increases your share of the expense.
If you visit doctors frequently, a plan with no deductible may be perfect for you and what you are looking for in coverage. However, if you are in good health and do not use medical services frequently, you will most likely not meet your plan’s deductible each year.
In the latter case, it would make more sense to purchase a plan with a higher deductible to offset the cost with lower monthly premiums. This way you will likely end up paying less in total.
Analyze your needs and hire the ideal insurance for you!
You already know the most important thing about the insurance deductible, so it’s just a matter of analyzing your situation, your needs, and your profile to decide what type of deductible best suits you.
Study the options, find out directly from the insurers you trust most, and start the process to be protected against any unforeseen event.
Do you have questions about the subject or about which company can provide you with the insurance you need? Get in touch with us! One of our advisors will be able to guide you through this process so that you can choose the perfect insurance for you and yours.
