If you are shopping for an insurance policy, you’ve heard of the term “deductible.” However, even though most people are aware that a deductible exists, many are not sure how it affects their policy premium or how they work in practicality. Every insurance policy, whether health, auto, or homeowners’, has a deductible.
Definition: A deductible is the amount of money a policyholder must pay out of pocket before an insurance provider will begin to pay any expenses.
Why are Deductibles Necessary?
Deductibles allow insurance companies to allocate costs between themselves and policyholders. But insurance companies need deductibles for two additional reasons: moral hazards and financial stability.
The term moral hazard reflects the risk that a policyholder may not always act in good faith. Without deductibles, the insured party could participate in risky behavior without suffering any financial repercussions. Deductibles ensure that the insured has “skin in the game” and will exercise care and caution when taking care of their health, home, or vehicle.
Financial stability refers to the role deductibles play in providing financial security to the insurer. If they were required to pay out on every incident, from minor to catastrophic, the premiums would likely be much higher. It would also make it much more difficult for companies to process claims promptly.
Thus, deductibles help maintain the insurance company’s business model, keeping premiums affordable and claims from piling up.
Choosing the Right Deductible
Generally speaking, the higher your policy’s deductible amount, the lower your annual or monthly premium payment.
Although you may be tempted to choose a high deductible to keep monthly payments low, there is a trade-off. You will need to come up with the full deductible before your insurance policy kicks in in the event of an accident. It is in your best interest to consult with your insurance advisor to discuss the right level of financial commitment both monthly, and if something happens.
Homeowners Insurance Deductibles
Like any deductible, a homeowner’s deductible is the amount a homeowner must pay toward a claim before the insurer pays its part. Typically, homeowners pay deductibles on a per claim basis, except for hurricane coverage deductibles, which are applied per season. If you meet your deductible after one hurricane, any subsequent damage in the same hurricane season would not be subject to a deductible payment.
If a single claim or incident involves two or more property coverage elements, there is typically only one deductible necessary. If, after a fire, you pay a deductible to fix the structure, another deductible to pay for your damaged contents is usually not needed.
There are three main types of home insurance deductible:
Dollar amount: Your deductible is a specific amount that you must pay before your insurer pays its portion.
Percentage: Your deductible is a percentage of your policy’s total coverage amount.
Split: A dollar amount applies to most claims, but a percentage can apply after certain events, such as a hurricane.
We Can Help You Decide
At Ezzi Insurance Advisors, we understand that there are many decisions to be made when choosing the right insurance policy. We take pride in our commitment to educating our customers as to the best insurance coverage for them.
Call us today for a consultation. We will work with you to find the right balance between your monthly premium, potential deductibles, and all of your insurance needs.
