Michael Chambers Heer
What Is a Deductible and Which One Should I Choose?
The deductible on your insurance is the amount of money on an insurance claim you would pay before the insurance company pays. It's what you'll be paying out of pocket prior to the insurance coverage.
A homeowners policy will typically have a $1000 deductible, although higher deductible options are available. Auto insurance policies typically have $500 deductibles for collision or comprehensive coverage. Your insurance company will offer higher deductible options and may even offer lower deductibles as low as $100 or $250.
How Does It Work?
Let's say you have a loss of $10,000. Your deductible is $1,000. The insurance company will pay for the loss minus your deductible, so $10,000 - $1,000 = $9,000.
Which Deductible Should I Choose?
Every situation will be different so there is no answer that applies to everyone. The rule of thumb is the higher deductible option you choose, the lower your premium will be. For example, let's say you choose $500 deductibles on your auto policy, and your premium is $1,000. If you choose $1,000 deductibles instead, your premium may drop to $900, saving you $100 each year. In this situation, as long as you don't make a claim where you are at fault within 5 years, it's in your best interest to choose the higher deductible option.. However if you end up making 2 claims in the next five years, you will save $500 in premium, but end up spending $1,000 more in deductibles.
Another thing to consider when choosing a deductible is how making a claim will affect your premiums. If you choose a low deductible, you are more likely to make a claim on a small loss. For example if you have a $250 deductible and you suffer a $750 loss, you might make a claim to get the insurance company to pay $500. However if your deductible was $500 and you suffered a $750 loss, you might not choose to make a claim to only get $250. Each time you make a claim, you risk a premium increase or having the insurance company not renew your policy. With that said, it is sometimes in your best interest to choose a higher deductible so that you are not tempted to make a claim that might result in a higher premium in the end.