Definition & Examples of Insurance Deductibles
An insurance deductible is the amount of money you will pay an insurance claim before the insurance coverage kicks in and the company starts paying you.
Here, you’ll learn the basics of insurance deductibles, including what they are, how they work, and how much they cost.
What Is an Insurance Deductible?
Insurance deductibles have been included in insurance contracts for years. When you sign up for an insurance plan, you agree to pay a certain amount before your coverage kicks in.
In other words, it’s the amount of money that you are responsible for paying when seeking insurance coverage for medical care or another sort of disaster, such as a car accident.
Often, your deductible could be in the form of a dollar amount, Otherwise, it could be listed as a percentage of the building or dwelling insured value, or total coverage amount. This is more common with coverages such as earthquake insurance, windstorm and hail damage, or on properties that may have higher risks or non-traditional home insurance like vacant homes.1
When you have a deductible, you have to come up with the amount of money for your deductible before a claim gets paid in many circumstances. Once you pay your deductible, the insurance company will pay you the rest of the claim value up to the policy limits and conditions in the wording.1
After you pay the deductible amount, your insurer will begin paying forth their portion of the insured loss. The amount the insurance provider pays at this point will vary from plan to plan.
For example, if you are robbed and you have $6,000 of stolen items, but you have a $1,000 deductible, you will pay the first $1,000 of loss and the insurance company will pay the remaining $5,000.
How an Insurance Deductible Works
You can think of deductibles as your part of “the deal” when it comes to insurance coverage.
Here’s how it works: When you buy insurance, you are protecting yourself against unforeseen financial risks that come in the form of losses or damages.
By buying insurance, you are asking the insurance company to “have your back” if you suffer damages that could hurt you financially. In turn, the insurance company usually says, “Sure, I’ll cover you if you have a loss (claim), but will you agree to pay the first part of it by paying a deductible?”
The consumer’s response might be, “Sure, I can afford to pay the first $500 of any loss, if you can pay the rest” (presuming that’s the deductible).
Once you choose your deductible or the portion of your risk you are willing to assume yourself, they will tell you how much they will charge you based on how much of the risk you’re taking on. The part of the risk you are taking on is the deductible.1
Examples of How a Deductible Works
You may have one deductible for your home and contents, and a different deductible if the cause of loss is an earthquake. Earthquake insurance usually has higher deductible limits.1
Another example of different deductibles on one policy is an endorsement or rider on your policy. The rider may have no deductible, even though the rest of your policy does.2 One reason a lot of people buy a rider is to avoid a deductible on certain high valued items.
How Much Is the Deductible?
Insurance is regulated by state and this applies to deductibles as well.1 You can ask your agent about your own state laws or contact your state insurance commissioner to fully understand how the laws impact deductibles in your area.
Your deductible should be listed as part of the terms and conditions of your contract on the declaration page of your insurance policy
If you are not sure what your deductible is or where to find it, ask your insurance company representative. You should also inquire whether there are multiple deductibles for different circumstances.
Who Decides How Much the Deductible Will Be?
As the person buying the insurance policy, you usually have the choice of how much of a deductible you will have. The higher the deductible, the lower the cost of your insurance.
There are a few different strategies you can use if you want to use your deductible to save money on your insurance. For example, with homeowners or auto insurance policies, it’s typically possible to up the dollar amount of your deductible in order to lower the cost of your overall policy.1
The higher the amount of risk you are willing to cover via the deductible, the less risk for the insurance company. Therefore, they reduce your premium. It’s a partnership where you and the insurance company agree to share the financial risks.
Insurance Deductible vs. Out of Pocket
When trying to understand how deductibles work, it’s imperative that you understand the difference between your “deductible” and your “out-of-pocket” maximum or limit.
Oftentimes, after you pay your deductible, your insurer will begin paying a certain percentage of your covered services. Typically, you’d pay a certain percentage of covered costs —and your policy provider would pay the rest.
Then, when talking about your out-of-pocket limit, this is the total amount that you’ll have to pay “out-of-pocket” within a policy year.
If your out-of-pocket maximum is $1,500 and you spend that amount within the term of your policy, your insurance provider would then pay 100% of your covered expenses for the remainder of the term.3
What Is a Minimum Deductible?
Your policy may have a minimum deductible. Insurance companies want you to pay your part in a claim, so in most cases, the insurance company will set a minimum deductible. You can increase your deductible to save money, but you can not decrease it if the insurance company has set a minimum deductible.4
Some companies offer zero deductibles or disappearing deductibles, so be sure and ask how your deductible works and if there is a minimum deductible or if you can have the option to have a zero deductible.
How Can I Save Money With a Deductible?
Even though you pay more of the claim when you have a higher deductible, most people do not have claims every year. So, every year you do not have a claim and take a higher deductible, you are saving that money.
You can change your deductible on your insurance policy to fit your needs. If you can afford a higher deductible one year but then feel that you would like to reduce the deductible later, it is not usually a problem. Just be aware that your premiums will also change, and if you have a high claims frequency, your premium may be especially high.
Policies Without Deductibles
When shopping for your insurance policy, there are policies that come with zero deductible. However, you’ll usually be charged a no-deductible fee or you may have to ask for a deductible waiver. A deductible free policy or even a waiver of deductible is possible.5
If you manage to find a zero-deductible plan, always ask how much the policy is without the waiver vs. how much the policy is with the waiver.
If the cost is the same, then consider it a loyalty perk or a nice feature of the policy you are buying. If there is a cost, it is then up to you whether having a zero-deductible plan is worth paying more.
Additionally, it’s important to note that deductibles do not apply to car liability and home insurance liability claims. They generally apply to the physical damage on home and auto policies.1
Why Do I Have to Pay Two Deductibles?
You pay one deductible per claim, in most circumstances, but every time you make a claim during a policy term, you will have to pay the deductible again.
If you run into some bad luck and have two incidents very close together that are unrelated, the insurance company will view this as two incidents. If you have two claims in one policy term, even if they are two days apart, you will have one deductible per incident. The deductible will also apply for each individual incident, even if the cause of the damage for each claim is the same.1
The only way to avoid paying two deductibles is if you show that the incidents were related or caused by one another, such as damages to both your home and vehicle from a storm.6
Insurance companies are pretty good at determining the cause of loss, but if you think they could use more information on the circumstance and it may prove the incidents were related, and not two separate incidents, then it is worth communicating this with your insurance adjuster.
Major Claims and Disasters
There are exceptions when you may not have to pay your deductible, or only one deductible may apply. For example:
- For hurricane damage, the deductible may apply per season or by calendar year. For example, Florida is the only state that uses calendar year deductibles for hurricane insurance claims.
- For flood insurance claims, there may be separate deductibles for your building structure and contents.1
- When you insure your car and home with one insurer, and the insurer has agreed you will only have one deductible in a loss that affects the two. This is one advantage of having your home and car insured together that could save money on your insurance costs.7
How Do Health Insurance Deductibles Work?
Understanding your health insurance policy is crucial, especially since you do not want to risk your health because you chose a health plan with too high of a deductible.
Just like with many other kinds of deductibles, your health insurance deductible is the amount you pay before your insurance policy coverage kicks in. For example, with a $1,000 deductible, you’ll independently pay the first $1,000 of your care.
Once you pay the deductible amount, you typically only have to pay coinsurance or a co-payment when visiting the doctor.
With some policies, there are certain services, such as check-ups or disease management programs, where you’ll receive coverage before paying your full deductible.9 That’s why it’s a good idea to check with your insurer and see if this applies to your prospective plan.