What is an Insurance Deductible?
Most insurance policies have a deductible. The insurance deductible is the amount of money you pay before the benefits of the insurance policy begin. In other words, the deductible is your “share of the loss". You satisfy the deductible by paying out of your own pocket before placing a claim with the insurance company.
How do Insurance Deductibles Work?
Let's suppose you have a small fire in your kitchen. The fire damages the cabinets around the stove. You get an estimate from a carpenter and it will cost $25,000 to replace the cabinets around the stove. You check your policy and find out that you have a $2,500 deductible. You file the claim with your insurance company and they send you a check for $22,500 ($25,000 - $2500 = $22,500). The $2500 deduction for your deductible is your share of the loss.
Suppose the fire only damaged one cabinet and your estimate is $2500. Now the math would look like this $2500 - $2500 = $0. If you placed a claim, the insurance company would pay you nothing. You probably would not claim the damage with your insurance company. If you did, you would have an insurable event on file where you collected nothing. These tiny claims seem meaningless unless you have other claims. Then the company might site this claim along with the others on a Notice of Cancellation.
What Kinds of Deductibles Are There?
Flat Deductible. This is the most common deductible. It's used in both Property and Casualty as well as Health Insurance. In Property and Casualty insurance, it's used on a “per claim" basis. If you have more than one claim in a policy period, you will need to satisfy your deductible on each of the claims. It does not accumulate and one claim can't be added to another to satisfy a deductible.
In Health Insurance, deductibles work on a per policy period basis. Each claim would accumulate until your deductible is satisfied before your Insurance Company would start to pay. For example, if you have a $5000 deductible on your policy starting January 1. You have 2 operations, one costs $3000, and then, a second one later in the year that also costs $3000. The company would add these together, $3000 + $3000 = $6000. They would subtract your deductible $6000 - $5000 = $1000. Starting with this $1000 and for the rest of the year, you would no longer be subject to a deductible.
Percentage Deductible. This deductible is based on a percentage of your coverage. Most of us see this in our Homeowner policies. Most policies have a flat deductible for all perils except Hurricanes. For Hurricanes, Florida insurance policies will usually use a percentage of your Dwelling Coverage. Multiply your Dwelling coverage by your deductible percentage to get your out of pocket deductible cost. If you carry $250,000 in dwelling coverage, and you have a 2% Hurricane deductible, you would be responsible for the first $5000 of Hurricane damage. ($250,000 X .02 = $5,000).
Time Deductible. Time deductibles are also known as a waiting periods. You see this in disability insurance and business interruption. In order for the insurance to pay, you first have to satisfy this waiting period. If you have a 30 day waiting period on a disability policy, you would have to be out of work for 30 days before your benefits begin.
Do Deductibles help me save money on my Policy?
Yes. The higher your deductible, the more money you save on your premium. You will have to pay more money out of pocket, but most people have only a few claims in their lifetime. The difference between a $1000 and $2500 deductible might not seem like much in one year. Added up over many years, you will likely save more than paying the extra premium for the lower deductible. Deductibles can also help consumers by keeping small claims from the loss ratios of insurance companies. This puts less pressure on companies to raise rates. It also helps you by discouraging frequent, small claims that might get your policy cancelled one day.
There you have it. Deductibles act as your “skin in the game". Although they cost you more out of pocket at claim time, they present a good balance between protecting your assets, while keeping your premiums down. And they could even help prevent your policy from being cancelled for placing small, frequent claims.
If you have any questions about deductibles or any other insurance questions, contact the licensed agents at Cronin Insurance.
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