MAKING SENSE OF INSURANCE DEDUCTIBLES

WHAT IS A DEDUCTIBLE?

A deductible is the amount of a loss that the insured is responsible for paying. For example, if you have a $500 collision deductible, and you wreck your car and have $2500 in repairs, you pay the first $500 of the repairs and the insurance company pays the remaining $2000.

With home, auto, or other types of property insurance, deductibles are paid for EACH loss that occurs. This means that if you have 2 accidents in 1 year, you will have to pay your deductible for each accident. Health insurance, on the other hand, the deductible is paid on an annual basis.

 

HOW DO DEDUCTIBLES AFFECT MY PREMIUM PAYMENTS?

Obviously, the higher the deductible, the lower your monthly cost of insurance.

Consider a basic example:

Situation A- your deductible is $500 and you pay $1,000 in premium each year.

Situation B- your deductible is $1,000 and you pay $800 in premium each year.

In situation B, you save $600 over 3 years which is more than the difference in the two deductibles.  Therefore, as long as a claim is filed less than every 3 years, you are saving money with a higher deductible.  On average, a homeowner has one claim every 9 years.  So in the situation above, the higher deductible is clearly the better option.

 

WHAT IF THE LOSS IS JUST ABOVE MY DEDUCTIBLE?

Let’s take a look at a common homeowners insurance scenario.

Scenario: You have a homeowners deductible of $1000 and have damages in the amount of $1459 due to water damage from an appliance.

Option A: If you turn in the claim, you stand to collect $459 and your total cost is $1000.

Option B: You pay the entire $1459 yourself.

When you look at the two options, you are saving $459 with Option A.  However, the impact this claim has on your insurance may be more costly than the $459 you saved.  You are likely to see an increase the following year, which could be as high as a couple of hundred dollars. In addition, if you suffer a serious loss shortly thereafter and are forced to file a second claim, you may become ineligible and non-renewed, which would lead to much higher premiums.

 

I KNOW I WANT TO REDUCE MY PREMIUM, BUT IS THE HIGHER DEDUCTIBLE WORTH IT?

When deciding on whether or not it is worth increasing your deductible, you should consider the following rule: if the payback period on the deductible is less than 3 years, you should increase the deductible.

For example:

By increasing from a $1000 homeowners deductible to a $2500 deductible, you save $550 on the annual premium. Therefore:

$2500 – $1000 = $1500 in additional deductible

$1500 / $550 = 2.72 years to get that money back.

These are all great tips in helping you assess the cost of your insurance. Obviously, higher deductibles can be an issue depending on your financial situation. However, they are excellent ways to save money and prevent yourself from filing small claims that may negatively impact your insurance.  Want to see how a higher deductible might impact your insurance?