Deductible

What is a deductible?

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.

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.

Car insurance policies in particular often have multiple deductibles. Typically, each major coverage within the policy will have its own deductible. You might have a $500 collision deductible, a $300 comprehensive deductible, and a $0 DCPD deductible, for example.

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).

What is the purpose of a deductible?

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 $1,000 deductible, it means any losses under $1,000 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.

Is it better to have a low deductible or high deductible?

There’s no one-size-fits-all solution to deductibles. Choosing a deductible means weighing risks against costs.

If 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.

If 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.

When it comes to choosing car insurance deductibles, the value of your vehicle is another factor. If your vehicle is old and not worth much, a high deductible might reduce the usefulness of your coverage. For example, if your old beater is only worth $2,000, you won’t get much use out of a $2,000 collision deductible. If the vehicle were totaled in a collision, you wouldn’t get anything from your insurance policy. The insurer would pay your vehicle’s cash value ($2,000), but you’d have to pay the deductible first (also $2,000) — so you’d get nothing. Keep that in mind when buying car insurance.

The important points

• When you make an insurance claim, the deductible is the portion of the settlement that the insured has to pay.
• Choosing a higher deductible lowers your premiums.
• Some policies have multiple deductibles depending on what caused the loss.

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