Deductibles are a vital component of any insurance
policy. But what is a deductible? How does it work? And how does it benefit me?
First we need to understand the purpose of an insurance policy. An Insurance policy is
an agreement between you and the insurance company.
You agree to pay a premium for the coverage and protection provided by the policy, and
in exchange,the insurance company agrees to pay for losses covered by the policy such
as fire damage. Insurance policies are not meant to cover
small losses or what some call ‘maintenance’ type losses.
They’re meant to protect you from the financial devastation that can occur, when you have
a large loss involving your home, auto, or business.
That’s why insurance policies include a deductible. The deductible is the portion of the loss
you’ll be responsible for – the amount you have to cover out of your own pocket when a loss occurs.
If you’re like most people, you don’t have enough money saved up to replace or rebuild
large assets after an unforeseeable, catastrophic loss
such as losing your home or business and everything inside to a tornado or fire.
On the other hand, you could probably afford to pay for a few hundred dollars out-of-pocket
to repair minor damages. By avoiding the smaller losses, your insurance
company can offer you coverage at a lower rate and still protect you from larger, financially
devastating losses. Another aspect of deductibles that can be
confusing, is when they apply. For medical insurance, you typically ‘meet’
a certain deductible amount for the year. Once met, the deductible no longer applies
for the rest of the year. With just about every other type of insurance
(including auto, home, and business), the deductible applies separately to each claim.
Let’s say heavy winds damage your roof. If the damage is covered by your policy, your
insurance company will pay for the loss, minus your deductible.
If you have a covered fire loss later that same year, your insurance company would once
again pay for the loss, minus your deductible. The important thing to remember about deductibles
is the higher your deductible, the lower your insurance premiums.
Because you are assuming more of the risk yourself, and not relying entirely on the
insurance company to pay for everything, they are willing to sell you your policy for
less. Ultimately, when deciding which deductible
amount to choose, you have to decide how much you’re comfortable paying out of your own
pocket in the event of a loss. Ask your local independent agent to help you
decide which deductible option is right for you.