Deductibles have been an essential part of the insurance contract for many years. Understanding the role deductibles play when insuring a car or home is an important part of getting the most out of your insurance policy.
A deductible is an amount of money that you yourself are responsible for paying toward an insured loss. When a disaster strikes your home or you have a car accident, the amount of the deductible is subtracted, or “deducted,” from your claim payment.
Deductibles are the way in which a risk is shared between you, the policyholder, and your insurer. Generally speaking, the larger the deductible, the less you pay in premiums for an insurance policy.
A deductible can be either a specific dollar amount or a percentage of the total amount of insurance on a policy. The amount is established by the terms of your coverage and can be found on the declarations (or front) page of standard homeowners and auto insurance policies.
State insurance regulations strictly dictate the way deductibles are incorporated into the language of a policy and how deductibles are implemented, and these laws can vary from state to state.
For dollar amount deductibles, a specific amount would come off the top of your claim payment.
For example, if your policy states a $500 deductible, and your insurer has determined that you have an insured loss worth $10,000, you would receive a claims check for $9,500.
Percentage deductibles generally only apply to homeowners policies and are calculated based on a percentage of the home’s insured value. So if your house is insured for $100,000 and your insurance policy has a 2 percent deductible, $2,000 would be deducted from any claim payment. In the event of the $10,000 insurance loss, you would be paid $8,000. In the event of a $25,000 loss, your claim check would be $23,000.
Note that with auto insurance or a homeowners policy, the deductible applies each time you file a claim. The one major exception to this is in Florida, where hurricane deductibles specifically are applied per season rather than for each storm.
Deductibles generally apply to property damage, not to the liability portion of homeowners or auto insurance policies. To use a a homeowners policy example, a deductible would apply to property damaged in a rogue outdoor grill fire, but there would be no deductible against the liability portion of the policy if a burned guest made a medical claim or sued.
One way to save money on a homeowners or auto insurance policy is to raise the deductible so, if you're shopping for insurance, ask about the options for deductibles when comparing policies.
Increasing the dollar deductible from $200 to $500 on your auto insurance can reduce collision and comprehensive coverage premium costs. Going to a $1,000 deductible may save you even more.
Most homeowners and renters insurers offer a minimum $500 or $1,000 deductible. Raising the deductible to more than $1,000 can save on the cost of the policy.
Of course, remember that in the event of loss you'll be responsible for the deductible, so make sure that you're comfortable with the amount.
Wind/hail and hurricanes are covered by standard homeowners insurance; flood and earthquake policies are purchased separately by homeowners. But each of these disasters has their own deductible rules. If you're in an area that's high risk for one of these natural disasters, understand how much of a deductible you'll need to pay if a catastrophe strikes. Start here, check your policies and speak to your insurance professional to learn exactly how your particular deductibles work.
Next steps: Steps to take in the event of a homeowners claim.