What are Insurance Deductibles?

What are Insurance Deductibles?

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Insurance deductibles are out of pocket payments the policyholder must make before he or she can start enjoying the benefits of insurance coverage. There is a general rule about insurance deductible. This rule states that the higher your insurance deductible, the lower the premiums you would have to pay, either monthly or annually. This is because, you are responsible for major costs before your insurance coverage kicks in.

In this article, you will learn more about insurance Deductibles.

Purpose of Insurance Deductibles

There is a purpose for everything under the sun. Thus, a purpose for insurance Deductibles. Without complexities, the main purpose of insurance deductibles is to share financial risks between two parties. The two parties involved are the insurance provider and the policyholder. The policyholder has to make out of pocket payments before his insurance coverage kicks in.

But why Must a Policyholder make out of pocket payments before he starts enjoying coverage?

Here are some reasons:

  1. Shared Risk

As earlier stated that both parties, that is, the insurance provider and the policy holder must share financial risk. The policyholder must go first while the insurer comes after. This process helps to maintain responsible behaviour and prevent unnecessary claims on the end of the policyholder.

  1. Cost Control

We also made mention that the higher the deductibles, the lower the premiums the policyholder will pay. This also works vice versa. That is, the lower the deductibles, the higher the Premiums the policyholder will pay either monthly or annually.

  1. Encourages Responsible Risk Management

Since the policyholder has not started enjoying his insurance coverage, he will maintain a cool head  because he knows if he engages in irresponsible acts, he has no coverage that will cater to any damage.

  1. Foster Understanding

Deductibles help policyholders understand the cost of their insurance policy, thereby making them make informed decisions based on their budgets and needs. This means that choosing a higher deductible is not mandatory, if you can’t afford it, then opt for a lower one but you should be aware that in the case of premiums, you will pay higher.

Types of Insurance Deductibles

It will interest you to know that there exist different types of insurance deductibles. They are;

  1. Standard deductible

The standard deductible is the most common kind of deductible where the policyholder pays a fixed amount out of pocket before his insurance coverage kicks in.

  1. Percentage deductible

As the name implies, the percentage deductible is an out of pocket payment based on a percentage of the total insurance value instead of a fixed amount like the standard deductible. For example, if a property is insured for $500,000, and the deductible is 10%, that means the policyholder will pay $50,000 as deductible before his insurance coverage kicks in.

  1. Split deductible

The split deductible comprises of different fixed amounts out of pocket. For example, a policyholder who insured his house may pay a deductible on theft and a different deductible on storm damage.

  1. Annual deductible

As the name implies, the annual deductible is the out of payment pocket within a policy year instead of paying per incident.

  1. Vanishing deductible

Not all policies offer this type of deductible. The Vanishing deductible is a dwindling out of pocket payment by a policyholder. As time goes on, the deductibles decrease until it is no more. But the catch here is that the policy must remain claim free.

This can serve as an incentive for policyholders informing them to maintain their coverage without making any claims.

  1. Hurricane deductible

The hurricane deductible specifically applies to areas that are prone to natural disasters like hurricane. You should take note that your house Insurance does not cover such calamities.

Factors Affecting Insurance Deductibles

Without beating about the Bush, here are some major factors that affect insurance deductibles;

  • Types of Insurance Policies
  • Coverage Limits
  • Premium Costs
  • Risk Profiles
  • Geographical Location
  • Type of Claim
  • Policyholder Preference
  • Insurance Companies

Importance of Understanding Insurance Deductibles

Listed below are some reasons why it is crucial to have a good understanding about Insurance Deductibles;

  1. Financial Preparedness
  2. Cost Management
  3. Policy Comparison
  4. Claim Decisions
  5. Risk Management and
  6. Policy Customization.

Tips for Choosing the Right Deductible

  1. Assess your Financial Situation
  2. Evaluate Your Risk Tolerance
  3. Consider Claim Frequency
  4. Review Premium Savings
  5. Factor in Policy Type
  6. Assess Coverage Limits
  7. Seek Professional Advice

Common Mistakes to Avoid with Insurance Deductible

  1. Choosing a Deductible you cannot afford.
  2. Focusing only on Premium Savings
  3. Ignoring Policy Details
  4. Underestimating Claim Frequency
  5. Neglecting to update Deductibles
  6. Overlooking Incentives and discounts
  7. Failing to seek professional Advice

Impact of Insurance Deductibles on Premium

  1. Inverse relationship between Premium and Deductibles. As earlier stated, the higher your Deductible is, the lower premium you would pay. And vice versa.
  2. Risk Sharing
  3. Cost Benefit Analysis
  4. Customization options
  5. Impact on claims


Making informed Decisions about Insurance Deductible

There are several factors you must consider which will Inform you on the right decisions about insurance Deductibles.

These factors are listed as:

  1. Assess your Financial Situation
  2. Understand the relationship between insurance deductibles and premiums
  3. Evaluate Your Risk Tolerance
  4. Consider Claim Frequency and severity
  5. Review Coverage Needs
  6. Compare Deductible options
  7. Seek Professional advice

This brings us to end of the right knowledge you need to be informed about Insurance deductibles.


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