A word often associated with insurance but sometimes not fully understood is “deductible.”  But what exactly does it mean?  Simply, the deductible is your self insured portion of a loss.  If you have a $500 collision deductible on your auto policy and you get in an accident, the first $500 of damage is your responsibility and your insurance company will pay the amount beyond your deductible.

Homeowners deductibles are similar.  If you have a $1,000 deductible and someone steals your cell phone… you’re pretty much on your own as your loss is going to fall BELOW your deductible.

Not all deductibles are fixed amounts though.  For example earthquake and flood deductibles are often percentage based.  So if you have a 15% earthquake (not uncommon actually to have one so high) and your home is insured for $250,000, your deductible in case of earthquake is $37,500.  That’s a lot of damage you’d have to incur before your insurance kicks in but earthquake insurance (like flood) often cause catastrophic damage to homes which is why the deductibles are usually so high.

Another key point about auto and homeowners deductibles that I get asked about often is if they are per calendar year like heath insurance.  Unfortunately they are not and are per occurrence.  If you get in an auto accident and have a $1,000 deductible, you’re pretty much out $1,000.  The day after your car is repaired you get in another accident, (besides being a really lousy driver) you’re also out another $1,000.

Health insurance deductibles are per calendar year so if you have a $3,000 yearly deductible, your health insurance won’t start paying until you’ve incurred $3,000 of medical car.

Although you may not have a choice through your employer’s health insurance what the deductible is since it’s often a group plan, you do get to choose what your home and auto deductibles are.  Simply, the lower deductible, the more you should expect to pay in premium.  If you can afford to take a $1,000 hit and are a pretty good driver, a $1,000 deductible (or even more) may not be such a bad idea.  But if you’d wouldn’t be able to get your car fixed if you had to come out that much in case of loss, your best bet is to pay a few bucks more a month and have a smaller deductible such as $500 or even less.  One tidbit about home and auto deductibles, if you have a car loan or mortgage (you probably do), there may be deductible caps that your loan company requires… maybe you can’t have a deductible over $1,500 for example.

At the end of the day, if you’re looking to get home and auto insurance, definitely get quotes with various deductibles and pick the right combination of lower premiums vs. lower deductibles that work best for you and how risk averse you are.

Should you have any questions or comments, please do not hesitate to contact me.

-Damon

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