Insurance is about balancing risk and deductibles are a key factor to consider in helping individuals do so. The benefits of using a deductible include:

  1. They keep premiums lower — With a higher deductible, the insured is taking on more risk, so the insurer will charge less for the premium.
  2. They discourage small or frivolous claims — By requiring some out-of-pocket payment or “skin in the game”, deductibles encourage policyholders to consider whether a claim is worthwhile to turn in or not.
  3. They provide options for the insured — For example, insuring property at full replacement cost with a higher deductible shifts more of the initial loss burden to the insured, while insuring property at actual cash value with a lower deductible places more of the total loss value on the insured.

Types of Deductibles:

  • Fixed-dollar Deductible: A specific amount you pay before coverage applies (common to auto and homeowners insurance).
  • Split Deductibles: Two specific deductibles depending on the loss type or “peril” with Wind & Hail deductibles being higher than “All Other” perils ($2,500 All /$5,000 W&H).
  • Percentage Deductibles: A percentage of the total insured value (1%, 2%, 3%, or even 5%)
  • Per-claim vs. Annual Deductible: Per-claim deductibles apply every time you file a claim (auto insurance) and annual deductibles reset each year (health insurance).

Ask yourself the following questions when choosing your deductible:

  • Can I pay this deductible in an emergency without changing my financial situation tremendously?
    • Determine for yourself what the number is, where it changes from not devastating to not acceptable
  • Will I file a claim with damage of $500, $1,000, $1,500, or higher?
    • If the answer is no, you could save some premium by increasing your deductible.
  • Would my premium savings be worth the additional exposure with a higher deductible?
    • Sometimes it is not! Usually the premium savings is worthwhile, but not always.
  • How many claims do I estimate will be filed in the upcoming policy year?
    • Planning for maternity would be one instance when an insured may want choose a lower annual deductible.
  • What is my actual deductible when using a percentage deductible?
    • $500,000 insured value x a 2% wind & hail deductible = $10,000 deductible

So next time you are reviewing your insurance, don’t just look at the premium. Take a close look at the deductible. It may be one of the most important numbers on the page!