Reviewed by Stefan Tirschler
de·duct·i·ble | dɪˈdʌktəbəl
Definition: The portion of an insurance settlement that is payable by the insured.
Insurance policies exist to pay back the money you lose because of an insurable loss. From that money, the insurer subtracts a deductible. The deductible is the portion of a loss that the insured is responsible for paying, and it’s a standard part of almost any insurance policy.
Joyce has a home insurance policy with a standard deductible of $500. Following a fire in her kitchen, her home needs $15,000 worth of repairs. Since her home insurance policy covers loss from fire, her insurer will cover the costs. Her policy’s deductible is $500, so Joyce pays the first $500 of repair costs. Her insurer pays the remaining $14,500.
Insurance policies often have more than one deductible. There is a standard deductible, which applies to most claims. Some policies include other deductibles that apply to specific types of loss.
Joyce’s home insurance policy has a standard deductible of $500 and a flood deductible of $2500. Her earlier kitchen fire fell under the standard deductible, so Joyce was only responsible for $500 of the repairs. Later in the year, her neighbourhood suffers a flood. It costs $10,000 to repair the flood damage to her home. Her policy’s flood deductible applies to this loss, so she pays the first $2500 of the repairs and her insurer covers the remaining $7500.
When you buy an insurance policy, your insurer will usually let you decide what your deductible is going to be (at least for the standard deductible). Deductibles usually range from $500 to $5000, but it depends on the insurer and the type of insurance. For example, Square One allows standard deductibles as low as $250 on primary homes.
Higher deductibles mean lower premiums, but also mean taking on extra risk yourself. Choosing the right deductible is a balancing act between risk and cost (more on that further down).
The main purpose of a deductible is to reduce the cost of insurance. The deductible represents a sharing of risk between insurer and insured. It makes the insured responsible for small losses.
For example, when you have a $1000 deductible, it means any losses under $1000 are your responsibility. This encourages insureds to take extra care and practice better risk prevention. This is related to a concept known as moral hazard. When fewer losses happen, insurers need less money to settle claims, which means lower premiums for everyone.
By asking insureds to handle small losses themselves, insurers also save money on administrative costs. The claims process is expensive—even when you ignore actual settlement costs—so it’s more efficient to focus efforts on handling big claims where the insureds really need the help. Lower administrative costs also help insurers keep premiums low.
There’s no one-size-fits-all solution to deductibles. Choosing a deductible means weighing risks against costs.
When you choose a low deductible, it means your premiums will be higher, but you won’t have to pay as much after a loss. It makes your policy more expensive, but it reduces your personal risk.
When you choose a high deductible, your premiums will be lower, but you will pay a larger share of any claim settlements. Your policy will be less expensive , but you will carry higher risk. Selecting a high deductible tells your insurer that you intend to pay for small losses yourself. They’ll offer you lower premiums in return.
When choosing a deductible, ask yourself how much you can reasonably afford to pay if a loss were to occur, and look for a deductible that matches that comfort level.
Even when you take precautions, accidents can happen. Home insurance is one way to protect your family against financial losses from accidents. And, home insurance can start from as little as $12/month,