The insurance industry loves to use confusing terms – like deductible, coinsurance, and copay. But, a deductible isn’t particularly confusing. Deductibles can affect your coverage in different ways, depending on the insurance type, causing many consumers to misunderstand how deductibles work.
In its most basic definition, a deductible is a part of the claim that you pay, There might be other parts of a claim that you’ll pay, depending on the type of insurance you have.
Home insurance deductibles
Your home insurance or renters insurance policy has a deductible for any covered claims for damage to your home, and there might be as many as three deductibles for your policy. Since only one deductible will apply to any given claim, we’ll start with the standard deductible.
Dwelling coverage deductible
Typically, a home insurance policy deductible is at least $500. Some insurers make $1,000 the default choice, and as a result, many of their policies are written with a $1,000 deductible.
You can often choose a higher deductible, but be aware that any claim you make will be affected by the higher deductible, lowering your claim payout. Your lender might also have some rules regarding higher deductibles. If you have a home loan, your house is their collateral for the loan, so they’ll want to be sure that any damage is repaired. A high deductible can stand in the way of needed repairs simply because the homeowner doesn’t have enough money to make the repairs.
For home insurance policies, the deductible you’ve chosen applies per occurrence, which means if you have a claim and then have another claim a month later you would pay the deductible for each claim.
It seems odd to say that you would “pay a deductible” because that’s really not what happens at all. The deductible is deducted from your claim payment. If the deductible is higher than your claim payment, your insurer won’t send a claim payment at all.
Personal property and deductibles
The contents of your home (your personal property) are also covered by your home insurance policy, up to your chosen coverage limit. Because there is a deductible, many legitimate claims for damage to personal property won’t be paid. If a $1,000 item, like a laptop, is damaged or stolen and your deductible is $1,000, your insurer won’t pay the claim. However, if several items were damaged or stolen and your insurer determines the loss amount was $5,000, they will pay $4,000 for the covered claim. Deductibles aren’t applied per item, rather, per occurrence.
Wind and hail deductible
It has become very common for insurers to use a separate deductible specifically for wind and hail damage. Often this deductible is higher than a standard deductible or it might even be based on a percentage of the total dwelling coverage. Wind and hail claims are the most common type of claims for damage to homes, particularly to roofs. A higher deductible for wind or hail damage places more of the risk for the most common claim type on the homeowner.
Named storm deductible
Living near a coastline certainly has its benefits, but can also create some additional risk for homeowners and often requires a special deductible called a named storm deductible. This deductible would apply if the damage to your home was due to a named storm, such as a hurricane or a large tropical storm.
In almost all states, the named storm deductible applies per occurrence. If your home is damaged by a hurricane in August and then damaged again by another hurricane in September, you would pay a named storm deductible for the damage from each hurricane.
Named storm deductibles are usually based on a percentage of the dwelling coverage amount for your home.
Home insurance deductible examples
Your home insurance policy may have as many as three built-in deductibles, only one of which will apply to a claim. If your home insurance policy has a land movement rider, there may be a fourth deductible that will apply only to covered claims for damage caused by land movement.
|Dwelling Coverage||Loss Type||Loss Amount||Standard Deductible||Wind and Hail Deductible (2%)||Named Storm Deductible (2%)||Claim Payment|
Auto insurance deductibles
If you have full coverage on your car, your policy will have a deductible for collision coverage and a separate deductible for comprehensive coverage. As with home insurance, only one deductible will apply to the claim, but the deductibles are per occurrence.
Collision deductibles usually start at $500 and go up as high as $2,500, but you can choose the amount from a list of choices. If your car is damaged in a collision and you report the claim to your own insurer, the deductible will be subtracted from your claim payment. If the accident wasn’t your fault, your insurer will try to collect your deductible amount from the other driver’s insurer through a process called subrogation. However, you might have to wait a while to get your deductible returned and if your insurer isn’t able to collect that amount, you might not get your deductible returned at all.
Fire, theft, vandalism, floods, and glass damage (not due to a collision) are all covered under comprehensive coverage. Your comprehensive deductible can range from $0 up to $2,500. Minimum deductible amounts might vary by state or by insurer. A low comprehensive deductible can help you cover mishaps like cracked windshields, which wouldn’t be covered if you chose a high deductible because the deductible would be higher than the cost of repair.
PIP or med pay deductible
Depending on your state, you may have PIP or med pay for the medical coverage of your policy to cover injuries and/or related expenses caused by an automobile. These coverages have a deductible as well, which you might have to pay in addition to a collision deductible if your car was also damaged in the same incident or accident.
Health insurance deductible
In the world of health insurance, deductibles are also common, but with one big difference from home or auto insurance deductibles. Health insurance deductibles apply per policy period as opposed to per occurrence.
The insurer won’t pay anything until the health insurance deductible is satisfied — although there are some exceptions. Once the you’ve paid enough medical expenses on your own to meet the health insurance deductible, your insurer begins to pick up the tab on healthcare expenses. Other deductions may apply though, such as copayments or coinsurance.
Using deductibles to manage premiums
Choosing a higher deductible can be an effective way to get a lower premium. In effect, you’re self-insuring your coverage up to the deductible amount. However, you’d need to ask your agent for quotes with various deductibles. Comprehensive coverage deductibles are a good example of where choosing a higher deductible often doesn’t provide any meaningful savings. The premium savings may or may not be worth taking the additional out-of-pocket risk.
We often don’t know how much our deductibles are until we have a claim. By then, it’s too late to make a change. It’s always a good idea to review your policy with your agent every year or two to be sure you’re properly insured and to see if there are any aspects of your policy, like deductibles, that could be structured better.