Deductibles have a crucial role to play in the insurance contract. When getting a car or a house insured, it is important that you understand the role of deductibles. Insurance policies that you come across will have different deductibles, so you have to make the decision wisely.
What Is A Deductible?
For those who don’t know, a deductible can be defined as the amount of money you have to pay for an insured loss. Deductibles allow the risk to be shared between the policyholder (i.e. you) and the insurer. The larger the deductible, the less you have to pay for the premiums for insurance.
The deductible can be a dollar amount or a percentage of the total insurance amount. The amount is decided on the basis of your coverage. The way deductibles should be made a part of the home insurance policy depends on state regulations and policies.
Types Of Deductibles
Deductibles can be divided into three types: dollar-amount, split and percentage-based. The difference between these three lies in the calculation.
Percentage-based deductibles became popular because of earthquake issues that arose in western states. This forced policymakers to create a policy that took natural disasters into account. Nowadays, people as well as businesses are seeing deductibles as high as 5% based on the value of their house. Suppose you have a house insured for $100,000 and a 1% deductible on it. As a result, you would have to pay $1000 of the covered loss before you can receive your claim.
The dollar-amount deductible is a specific amount that has to be paid by you before the insurer steps in. For example, suppose your house catches fire and the damages cost $3000. If your deductible is set at $1000, you will first have to pay that amount out of your pocket, after which the insurance provider will step in.
The third deductible is a combination of the types mentioned above. The dollar deductible is used for most claims, and the percentage deductible is used in certain events such as in cases of natural disasters.
How Do Deductibles Work?
In the case of dollar amounts, a specific sum is deducted from the total payment. Suppose you have a policy with a $500 deductible. If you come across an insured loss of $9000, the check you will receive will be for $8500.
Generally, percentage deductibles apply to only homeowners policies and the deductible is calculated based on the insured value of the house.
Deductibles And Natural Disasters
Normally, natural disasters aren’t covered by insurance policies and require special coverage. These coverage policies involve a deductible and limit set for each portion. For example, if your house was destroyed by an earthquake and had a coverage of $300,000 with a 20% deductible, you will be required to pay 0,000. The remaining amount will be covered by the insurance provider.
In areas where the chances of natural disasters are high, insurers would encourage people to have high deductibles. However, this may not be a good idea for you as you will need all the support you could get if you are affected by natural disasters.
Raising Deductibles Can Help Save Money
You can save money on an insurance policy by raising the deductibles. If the deductible is increased, you will have to pay less premiums. However, keep in mind that in case of a loss, it will be you who is responsible for the deductible, so choose an amount that you are comfortable with.
Choosing the Right Deductible
Making a decision about deductibles based on your own conditions is important. You don’t want to opt for something that you will end up regretting later. Making an informed decision will protect you in every way possible.
If You’re Financially Strong
For people who have enough money, paying high premiums for low deductibles and low premiums for high deductibles don’t matter. Since you are financially comfortable, it doesn’t matter what choice you make. Good calculations are required in this scenario. Do you want to save through low premiums or would you want more support when dealing with a loss? This has to be kept in mind while trying to make the decision.
If You Aren’t Financially Strong
People struggling financially come across a different scenario. Lower premiums become the need for those who have less money, but in case a claim arises, they usually don’t have enough on hand to pay the deductible. If you don’t have enough emergency funds on hand, having higher deductibles can make you feel more comfortable. You can use credit facilities in such cases. We wrote a great article about more tips on how to save on homeowners insurance, click here to read the full article.
If You Are Not Well-Off But Financially Stable
For people belonging to the middle class, they have to determine the deductible themselves. Ask yourself how much you can pay. Make a decision depending on your comfort level. Don’t go hard on yourself by choosing a higher deductible.
Claims and Deductibles
The point of low deductibles is to protect yourself from even small losses, but in most cases, the deductibles don’t meet all economic expectations. This may happen because of the risk speculations that insurers make. They get the idea that if you have made claims in the past, there are chances you will do so again. Thus, in cases of a claim, the insurance company will raise the premium when renewal time comes. This results in you ending up paying more.
Most insurance companies also offer a 1-time discount to customers who have never filed an insurance claim. The discount can vary from 5-20% depending on the company you have chosen. If you are able to negotiate a discount and file a home insurance claim, there are chances that the cost of your premium will increase.
Emergency funds should also be kept in mind when paying the deductible. Raising a deductible can result in financial stress. In cases of an emergency situation, liquid assets should be available.
When Do Deductibles Apply?
Home deductibles are not like health plans. Health plans normally have yearly deductibles and once you have reached the limit, the insurer will pay for everything else.
With home insurance, the deductibles are based on the claim. This is bad news for all those who live in areas prone to damage such as earthquakes.
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