Having insurance is a way of protecting yourself from unpredictable events. It could be a car accident, a natural disaster, or a medical emergency.

However, insurance policies can be complicated, and you might not always understand the terms and the figures in your policy documents. One of these terms that can be confusing is the deductible. In this article, we will explain what a deductible is, how it works, and how it affects your insurance coverage.

What is a Deductible?

A deductible is an amount that you pay out of pocket before your insurance kicks in. It is a fixed amount that you agree to pay when you purchase your insurance policy.

For example, if you have a car insurance policy with a $500 deductible and you get into an accident, you will have to pay the first $500 of the repair costs, and your insurance will cover the rest. The insurance company will reimburse you for the repair costs that exceed the deductible amount.

It is important to note that the deductible applies to each claim you make. So, if you have two claims in the same year, you will have to pay the deductible twice.

How Does a Deductible Work?

Let’s say you have a homeowners insurance policy with a $1,000 deductible. A storm damages your roof, and the repair costs $7,000. You file a claim with your insurance company, and they send an adjuster to assess the damage.

The adjuster determines that the repair costs are indeed $7,000.

Now, because you have a $1,000 deductible, you are responsible for paying the first $1,000 of the repair costs out of pocket. Your insurance company will cover the remaining $6,000.

If the repair costs were only $800, then you would have to pay the full amount, since it is lower than your deductible.

It is important to remember that the deductible and the premium are inversely correlated. The higher the deductible, the lower the premium, and vice versa. If you choose a lower deductible, you will pay a higher premium.

Types of Deductibles

There are different types of deductibles that you should be familiar with:.

Standard Deductible – This is the most common type of deductible. It is a fixed amount that you agree to pay when you purchase your insurance policy.
Percentage Deductible – This is a percentage of the total amount of your coverage. For example, if you have a policy with a $50,000 coverage and a 2% deductible, your deductible would be $1,000.
Split Deductible – This is a deductible that is split into two parts. For example, if you have a $1,000 split deductible, you would pay $500 for one type of loss and $500 for another.
Zero Deductible – Some insurance policies offer a zero deductible option, which means that you don’t have to pay anything out of pocket when you file a claim. However, this option usually comes with a higher premium.

When Does the Deductible Apply?

It is important to understand when the deductible applies and when it doesn’t. The deductible applies only to certain types of losses, depending on the insurance policy. For example:.

Auto insurance policies usually have deductibles for collision and comprehensive coverage, but not for liability coverage. This means that if you cause an accident and damage someone else’s car, your insurance will cover the other car’s repair costs without a deductible.
Homeowners insurance policies usually have deductibles for property damage, but not for liability claims. This means that if someone is injured on your property and files a claim against you, your insurance will cover the legal fees and settlement costs without a deductible.
Health insurance policies usually have deductibles for medical procedures and prescription drugs, but not for preventive care. This means that if you go for a routine check-up or get a vaccination, you won’t have to pay a deductible.

Conclusion

Deductibles are an important part of insurance policies. They determine the amount you pay out of pocket before your insurance coverage kicks in.

Understanding the types of deductibles and when they apply can help you make an informed decision when choosing an insurance policy. Remember that the deductible and the premium are inversely correlated, and a higher deductible means a lower premium.