Authors: Gosha Olszewski Neal Gardner
So, what is a deductible in insurance terms?
A deductible is an agreed out-of-pocket expense that the policyholder selects when buying a policy. It's the amount you pay when you file a claim, with your insurance covering the rest. For instance, if you have a $1,000 deductible and your claim is for $5,000, the insurer pays $4,000 after you pay the first $1,000.
Insurers use deductibles to share part of the financial responsibility with the policyholder in case of a claim. Opting for a higher deductible can lower your premium. Deductibles are common in many types of insurance plans, but their function may differ.
Types of deductibles
Fixed deductibles: When an insurance has a fixed dollar-amount deductible, the insurer deducts this amount from the claim payout. For example, if you have a $1,000 deductible on a $100,000 claim, you pay $1,000, and your insurer covers the remaining $99,000.
Percentage deductibles: The deductible is a percentage of the insured value or the claim amount. For example, if you have a 2% deductible on a $200,000 home, you pay $4,000, and the insurer covers anything above $4,000. Percentage deductibles are typically used only in home insurance.
Deductibles in home insurance
Home insurance deductibles apply solely to property damage claims — homeowners aren't required to pay a deductible for liability claims. However, for property damage claims, the deductible is applied each time the homeowner makes a claim: if a homeowner files multiple claims in a year, they pay the deductible for each separate claim. The insurer subtracts the deductible amount from the claim payout before covering the remaining loss.
With standard or dollar-amount deductibles, the specified amount is deducted from the claim payout. For example, if the deductible is $500 and the loss is $10,000, the insurer pays $9,500.
Deductibles in auto and personal liability insurance
In auto insurance, a deductible can apply to coverages such as collision and comprehensive insurance. For instance, if you have a $500 deductible and incur $2,000 in damages from an accident, you pay the first $500 and your insurer covers the remaining $1,500.
However, there are key differences between filing a claim for comprehensive versus collision coverage:
- Collision insurance covers damage from accidents involving other vehicles or objects.
- Comprehensive insurance applies to non-collision incidents such as theft, vandalism or weather damage.
Personal liability coverage typically doesn't have a deductible, so the insurer covers the full amount of a valid claim from the first dollar.
Why are carriers encouraging consumers to take more financial responsibility?
In recent years, weather-related disasters in the US have become more frequent and costly. As claims increase and administrative costs rise, insurers are encouraging consumers to absorb part of the loss through higher deductibles. This shared financial responsibility helps keep overall insurance costs in check, ensuring long-term affordability for both consumers and insurers.
Filing a claim can lead to higher premiums upon renewal, as insurers may see the claimant as a higher risk. In some cases, handling repairs yourself may be the smarter choice. For example, if your deductible is $1,500 and you have minor roof damage costing $1,800 to repair, paying out of pocket might be better than filing a claim for just a small reimbursement.
Covering smaller repairs yourself can help avoid premium increases and keep your insurance affordable in the long run. The key is weighing the repair cost against your deductible and potential future rate hikes.
How can this change benefit you?
At first glance, higher or percentage-based deductibles might not appear positive. However, they do come with certain advantages.
- Lower premiums: Choosing a higher deductible means you pay more before the insurance covers the rest. In exchange, you save on premiums if you don't file any claims.
- Better claim decisions: A higher deductible encourages more selective claim filing, helping you maintain a clean record and affordable premiums. By taking on greater upfront financial responsibility, you also support insurers in managing rising costs, which can lead to lower premiums and longer-term affordability.
It's important to understand that insurance is designed to cover large and catastrophic losses instead of $500 spoiled food claims after a power outage.
How do you decide the right deductible for you?
Deciding on insurance deductible amounts may depend on your lifestyle and finances. If you have some savings for emergencies and can afford a higher deductible, you can save money on recurring premiums.
Where you live may also dictate your insurance deductible. If you live in a hurricane- or flood-prone area, percentage-based deductibles may be unavoidable.
Remember that every loss doesn't need a claim. For minor damages, such as a broken window, it may be more cost-effective not to claim, as filing frequent claims can increase your premiums over the longer term.
Ask a personal insurance expert at Gallagher
Choosing the right insurance deductible that works for you is an important decision. Our advisors can help you understand your options and guide you on what may be best for your personal circumstances.
