Understanding deductibles
Low deductibles mean higher premiums; make sure to review your policies regularly
If you’ve ever had an auto or home insurance claim, you’ve likely dealt with the deductible. While having a deductible may seem unfair with regard to the cost of insurance, it has a place in the process and actually can save you money.
A deductible is the amount of money deducted from an insurance claim upon settlement. For example, if your auto insurance policy carries a $500 deductible for collision losses, that means $500 is deducted from the claim settlement.
It serves as an agreement between you and your insurance company on how claim risks are shared. You, as the consumer, want to use the insurance company’s money to repair or replace your vehicle, which may run several thousands of dollars. In exchange, you agree to pay or have a relatively small amount deducted from that claim check.
The choice of a deductible amount depends on how much of the cost you’re prepared to carry. The higher the deductible on your policy, the lower your insurance premium becomes. If you have $1,000 or more set aside in emergency funds, then choosing that deductible can save you money.
On the other hand, if you don’t have emergency funds set aside and choose lower deductibles, you are asking the insurance company to pick up more of the costs in the event of a claim. Therefore, the insurance company is going to charge a higher premium for that.
It is important to remember that the premium acts as your payment into the insurance company’s claim pool, minus administrative, sales, and growth costs. Your premium and those of other policy holders are pooled together to ensure there is sufficient funds to pay claims when they happen.
If you elect not to have auto policy deductibles, then you are agreeing that any physical losses incurred by you will be paid for solely by you, not the insurance company.
When it comes to home insurance policies, deductibles may be dollar amounts or percentages of coverage. For example, it is not uncommon for home insurance policies to carry a $1,000 deductible. Some companies may charge a percentage, which means a policy insuring a $250,000 home may have a one percent deductible, which is $2,500.
While there may be some premium savings with the percentage deductible, one must remember that home policy coverages often increase over time to keep pace with inflation, meaning the deductible may also increase.
Home policies also may carry different deductibles that are peril specific. A peril is a covered cause of loss such as fire, theft, windstorm, and more. In the last 20 years, more insurance companies have adopted wind and hail loss deductibles that are higher than normal home policy deductibles.
For example, a home policy may have a standard $1,000 deductible to cover most losses, but a one-percent wind and hail deductible for damages caused by those two perils. That can be surprising for some homeowners when they file a claim for damages caused by high winds and tornado and assume their standard home deductible will apply.
As with all insurance products, policy owners should meet regularly with their insurance agents to review and understand what their policies do and do not cover.
Alan T. Girton is a veteran agent with Indiana Farm Bureau Insurance. To learn more, visit https://www.infarmbureau.com/agents/Alan-Girton-Howard-Kokomo-IN