Deductibles: The Out-of-Pocket Insurance Payments

20.03.14 Basement Nerd Insanely Cheap Quotes

Whenever you purchase an insurance policy, there is something known as the “deductible” to worry about. If you are willing to accept a higher deductible, your premiums will be lower. The opposite is also true. However, what is a deductible? Why does it exist? How do you go about choosing your deductible?

What Is the Deductible?

A deductible is an amount of money you pay, out-of-pocket, whenever you make an insurance claim. We will use car insurance with a $5,000 deductible to illustrate the principle. Keep in mind that deductibles do not apply just to car insurance, they apply to any type of insurance you might purchase.

Insurance Claim

 That said, let us assume you’re in a car accident that results in $15,000 damage to your car. When you file an insurance claim with your carrier, they are expecting you to pay the first $5,000 toward repairs. They will estimate the total cost of the damage and reimburse you for the difference. In this case, you would get a check for $10,000.

Homeowners insurance and health insurance work the same way. The one difference with health insurance is that deductibles are capped on an annual basis. With car and homeowners insurance, deductibles are established on a per claim basis.

Why Do Deductibles Exist?

The purpose of the deductible is very simple: it is to deter consumers from filing trivial claims that amount to very small financial reimbursements. Using car insurance again, your insurance company does not want you to file a claim for scratches and dings that can be repaired for a couple of hundred dollars. These types of trivial claims cost more money to administer than they are worth. It is better for your insurance company if you just pay them on your own.

In the arena of health insurance, the deductible serves the same purpose. It is designed to encourage consumers to access healthcare services responsibly, rather than running to the emergency room for every little thing. Unfortunately, the principle has proved unsuccessful in a day and age when so many people have HMOs.

How Do You Choose a Deductible?

Choosing an appropriate deductible comes down to one word: risk. In other words, how much financial risk are you willing to bear in relation to the cost of your monthly premiums. As we mentioned earlier, accepting a higher deductible will result in lower monthly premiums. A lower deductible will raise your premiums.

The best way to choose a deductible is to sit down and go through your monthly budget prior to purchasing a policy. If you can afford to put some money away in savings every month, and you are committed to doing so, you can accept a higher deductible in exchange for lower monthly rates. If your budget will not allow savings, take the lower deductible. The last thing you need is to be thousands of dollars in the hole in the event of an insurance claim.

Also, be very careful before you even consider committing insurance fraud as a way to get back what you spend on the deductible. This is a very common practice, especially where auto insurance is concerned. Under a fraudulent scenario, the auto repair shop may inflate its estimate for repairs under the guise of splitting the difference with the owner of the car. It may sound like a great way to recover your deductible, but it is illegal and drives up the cost of insurance for everyone else.

Insurance deductibles are a necessary part of the insurance business. Learn everything you can about the concept so that you can make an informed decision when it is time to purchase a new policy.  If you are looking for help in finding out which deductible is right for you be sure to visit for all your insurance questions, our professionals can help get you the answers you need.

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