Most types of insurance plans have a deductible, which is how much you must pay out of your pocket before your insurance plan starts to pay. For example, if you have a $1,000 deductible, you pay the first $1,000 toward a covered claim and then your insurance will help pay for the rest.
Auto and homeowner's insurance policies both have deductibles. Knowing how deductibles work and how they impact your policies can help you choose the right deductible for your situation and avoid having to pay more out of pocket.
HOW DO DEDUCTIBLES WORK?
Automobile Insurance
You are responsible for your policy’s stated deductible every time you file a claim. After you pay that amount, your insurer will cover the remaining cost to repair or replace your vehicle.
If your claim is approved, your deductible will be applied when the company issues your payout. For example, your claim was approved for $5,000 and your deductible is $500. In this case, your insurance company would issue you a check for $4,500.
If the other driver is found to be at fault, their insurance company can pay for your repairs if you file a claim. In this case, you wouldn’t have to pay your deductible. Or, if you choose to go through your own insurer, they will seek reimbursement (including the deductible) from the other driver’s insurance company.
If fault is shared, you may end up paying some or all of your deductible.
You may have a deductible for both comprehensive and collision coverage. You may also have a deductible for personal injury protection or uninsured/underinsured motorist property damage (in some states).
Home Insurance
When the insurance company pays for a claim, it will be the total amount of the damage minus the amount of the deductible. You then pay the rest of the money to the person or company hired to fix the damage.
For example, if your deductible is $500 and you have $5,000 in repairs, the insurance company will pay you $4,500 for that claim and the remaining $500 will be paid by you out of pocket.
You must pay your deductible for every claim you file. If you file multiple claims, you must pay that deductible each time.
You may have a standard deductible, which is a fixed dollar amount, or a percentage deductible, which is a percentage of your home’s insured value.
WHEN DO YOU PAY A DEDUCTIBLE?
You will pay a deductible any time you file a claim under a coverage that carries a deductible as long as the damage is covered and costs more than your deductible amount.
WHAT IF MY DEDUCTIBLE COSTS MORE THAN MY REPAIRS?
For both auto and home insurance, if the cost of damage is less than your deductible, the insurance company pays nothing. In this case, you wouldn’t file an insurance claim and would instead just pay the amount due.
HOW TO CHOOSE A DEDUCTIBLE
Automobile Insurance
There are both high and low deductibles for auto insurance: Higher deductibles mean lower auto insurance rates and higher out-of-pocket costs. Lower deductibles mean higher auto insurance rates and lower out-of-pocket costs.
Choose a deductible amount you’re comfortable with and that you can afford to pay, should you need to file a claim. Consider the likelihood of having to file a claim—if it's low, you may want to go with a higher deductible and pay lower rates.
Home Insurance
You’ll want to weigh the short-term cost of a deductible against the long-term cost of a policy.
Understand how your deductible affects your premium. For example, if you’re more likely to make a claim, you may be deemed higher risk so your premium may be higher.
Also consider how much it’s going to cost the insurer to pay your claims. The more you pay out of pocket, the less your insurer will pay, so your premium may be lowered.
