If you’ve had any experience buying insurance or filing a claim, then you’ve probably heard the term “deductible” but may not fully understand what it is or how it works. In a nutshell: A deductible is an out-of-pocket payment you must make before your insurance coverage takes over. The deductible you choose directly impacts your premium and up-front costs, making it an important factor when shopping for or comparing car insurance policies.
What Is an Insurance Deductible?
A deductible is a form of risk-sharing. You agree to shoulder a portion of the financial burden after an insurance claim – either a fixed dollar amount or a set percentage – in exchange for protection against covered events or losses. If you file a claim and your insurer approves it, you pay the deductible amount stipulated in your insurance contract, and your insurer will pick up the rest of the bill, up to your policy limit.
You choose a deductible when you purchase your policy. Depending on the policy type and insurer, you may be able to adjust it during the policy term, after a life-changing event, or when you renew your policy. Typically, choosing a larger deductible means paying a lower premium. You’ll save money upfront because you’re assuming a greater share of the risk in the event that you suffer a loss, such as a car wreck, or need to seek medical care for an illness or injury. But you’ll pay more out of pocket should you file a claim, potentially negating any savings from that lower premium.
How Does an Insurance Deductible Work?
That depends on the kind of policy you have. Auto, home, and renters insurance policies apply a deductible amount to each and every claim you make in a given year. For example, suppose your home insurance has a $1,000 deductible. One day there’s a kitchen fire that causes $10,000 worth of damage, which the adjuster determines is covered by your policy. The insurance company will send you a check for $9,000, representing the $10,000 cost minus your $1,000 deductible. Later that year, a separate incident causes a similar amount of damage. Once again, that $1,000 deductible will be applied against any claims settlement.
Health insurance works a little differently. Instead of applying to each claim independently, the deductible represents the total amount you must pay out of pocket annually for the cost of covered services and procedures. Once you’ve met that threshold, your insurer should assume either the entire cost or a major portion (such as 80% or 90%) of any future approved treatment. Depending on your policy, you may still be responsible for any related copayment, the set amount you agree to pay for services like a checkup or lab work.
Car Insurance Deductibles
There are several different types of auto coverage available, but you are most likely to encounter a car insurance deductible with:
- Comprehensive coverage. Despite the name, comprehensive coverage doesn’t cover everything. It applies to damage caused by events other than a collision, such as severe weather or a wildfire, or by acts such as theft or vandalism. Coverage is limited to your vehicle’s actual cash value, and deductibles can range from as little as $100 to $1,000 or more. Experts recommend choosing one in line with how much your car is worth.
- Collision coverage. This applies to damage to your vehicle from hitting something such as a utility pole or another automobile. In the event of an accident, the collision insurance deductible only will apply to repairing or replacing your car. Any damage to someone else’s property that you’re held responsible for would be covered under your liability insurance instead, and liability insurance doesn’t carry a deductible. Deductibles for collision coverage can vary from a few hundred dollars to more than $1,000, depending on the policy, or you may be able to waive it entirely.
- Personal injury protection. Also known as “no-fault” insurance, PIP pays medical expenses for both the policyholder and anyone else in the vehicle at the time of an accident.
- Underinsured/uninsured motorist coverage. This kicks in if you’re in an accident caused by a driver who doesn’t have enough insurance to cover your injury and/or vehicle damage – or who doesn’t have any insurance at all.
Most drivers need to purchase liability insurance, but that’s one type of coverage that doesn’t include deductibles. If you’re responsible for an accident and have liability insurance, your insurer will cover the other party’s damages. You won’t need to pay a deductible, but your rates may increase.
Homeowners Insurance Deductibles
A home insurance deductible can be either a flat amount, such as $500 or $1,000, or a percentage based on your home’s insured value. For instance, if your policy has a 2% deductible, and your home’s insured value is $200,000, your share would be $4,000. A typical homeowners insurance policy will protect your dwelling and personal belongings in the event of certain disasters, such as fire, theft, or lighting, according to the Insurance Information Institute (III). But some perils require separate coverage that may come with its own deductibles, depending on where you live, including:
- hurricanes. If you live in a coastal region, state law may require your homeowners policy to include a separate deductible for hurricane-related damage. Usually, this will be a percentage-based value of 1% to 10%, depending on the company, according to the National Association of Insurance Commissioners (NAIC).
- Wind and hail. Similar to those for hurricanes, these are likely to appear in policies for regions prone to severe windstorms and hail, such as the Midwest. Wind and hail deductibles are generally a percentage amount, typically 5% of insured value, according to the III.
- Flood. This kind of insurance is sold primarily by the National Flood Insurance Program (NFIP), although private insurers also sell policies. The Federal Emergency Management Agency (FEMA), which oversees the NFIP, indicates that flood insurance typically carries two deductibles, one for the structure and one for its contents. They range from $1,000 to $10,000.
- Earthquake. These are percentage-based. Depending on where you live, expect to pay 2% to 20% of your home’s insured value, according to III and NAIC estimates. In some quake-prone states, like Washington, the minimum deductible is about 10%. In California, it can be even higher. Policies administered by the California Earthquake Authority, which issues most earthquake insurance in that state, carry deductibles as high as 25%.
Renters Insurance Deductibles
A renters insurance deductible operates the same way a homeowners insurance deductible does. It can be a flat dollar amount, like $500, or a percentage, like 2%. A renters policy covers many of the same basic perils, including theft, fire, bodily injury, and loss of use, depending on the policy. Each time you file a claim, you are responsible for paying the deductible amount, and your insurer will pick up the remaining balance, up to your policy limit.
Health Insurance Deductibles
Unlike auto, home, or renters insurance deductibles, which you pay per approved claim, health insurance deductibles refer to a specified amount you must spend on prescriptions or services (eg, hospital bills, surgeries, lab tests, etc.) before your insurer will begin to cover expenses. In most cases, copays don’t count towards your deductible.
For instance, if you break your arm and need to visit the ER and undergo treatment, and you have a $1,500 deductible, you’d need to pay $1,500 before your insurer covers any remaining expenses. If the total cost of treatment was $10,000 and your insurer picks up 100% of costs after you pay a deductible, they’d cover the remaining $8,5000.
Not all policies cover all additional costs, however. Some use a coinsurance model. In this scenario, the insurer pays a percentage of costs – 80% or 90%, for example. In that case, you would need to pay the remaining balance, 10% to 20% of the costs using the example above.
Common types of health insurance plan deductibles include:
- prescriptions. If your health insurance policy contains coverage for prescriptions, it may also include a separate one for medication.
- In and out of network care. If you get care from a health professional or medical facility that’s not included in your insurer’s network of approved providers, you may have to meet a separate, out-of-network deductible, and that one could be higher than for in-network care.
- Family coverage. There are a couple of different ways companies handle family health insurance policies. Some insurers apply all covered costs toward your annual deductible, no matter which family member is being treated. This is known as an aggregate deductible. Other insurers impose what’s known as an embedded deductible, whereby each member of your family must meet a set limit before insurance applies to their care.
What is the difference between an insurance premium and a deductible?
A premium is the cost of your insurance coverage. If you receive health insurance through your employer, you may see a portion of your health insurance premiums deducted from each paycheck. Depending on your provider, you may also be able to pay your premiums monthly, semi-annually, or annually.
A deductible is an amount you’re responsible for paying toward any claim or medical bills before your insurer will pick up any costs. This could be a set dollar amount or a percentage.
Can I change my deductible?
Car insurance and renters or homeowner insurance companies generally allow you to increase or decrease your deductible or make other policy changes at any time, although you may be subject to fees for doing so. Health insurance policies usually cannot be altered until the policy is set to renew, frequently known as the open enrollment period, or if you’ve had a qualifying life change, such as getting married, having a child, or losing a job.
What is a minimum deductible?
A minimum deductible refers to the lowest deductible amount offered by your insurance company. For instance, an auto insurer may offer policies with deductibles ranging from $500 to $2,500. The $500 deductible is the minimum deductible and the lowest available. You can’t lower this figure, but you can increase it, which will lower your premiums. Some auto insurance policies will decrease your deductible over time as a reward for safe driving.
How long does a deductible last?
How long your deductible lasts depends on the type of insurance you purchase. Broadly speaking, automobile, homeowner, and rental insurance providers apply it to each claim you file during the policy term. With health insurance, the deductible represents your out-of-pocket obligations for the year, either for the entire policy, a covered member, or a specific type of expense, like prescriptions.
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