Deductibles have been an essential part of the insurance contract for many years. Understanding the role deductibles play when insuring your car or home is an important part of getting the most out of your insurance policy. Here’s a brief description of what a deductible is and how it can be helpful if you need to submit an insurance claim.

Deductibles, defined

A deductible is an amount of money that you yourself are responsible for paying toward an insured loss. When a disaster strikes your home or you have a car accident, this amount is subtracted, or “deducted,” from your claim payment. Deductibles are the way in which a risk is shared between you (the policyholder) and your insurer. Generally speaking, the larger the deductible, the less you pay in premiums for an insurance policy.

How deductibles work

These amounts can be either a specific dollar amount or a percentage of the total amount of insurance on a policy. The amount is established by the terms of your coverage and can be found on the declarations (or front) page of standard homeowners and auto insurance policies: 

For dollar amount deductibles, a specific amount would come off the top of your claim payment.

Example: Your insurer has determined that you have an insured loss worth $6,000. With a $500 deductible, you would receive a claims check for $5,500.

Percentage deductibles generally only apply to homeowners policies. They are calculated based on a percentage of the home’s insured value.

Example: If your house is insured for $200,000 and your insurance policy has a two percent deductible, $4,000 would be deducted from any claim payment.

Deductibles generally apply to property damage, not to the liability portion of homeowners or auto insurance policies. There are no deductibles for liability in car insurance, but there are ones for comprehensive and collision coverage.

Raising your deductible can save money

One way to save money on a homeowners or auto insurance policy is to raise the deductible. So, if you’re shopping for insurance, ask about the options for deductibles when comparing policies. Increasing the dollar deductible from $200 to $500 on your auto insurance can reduce collision and comprehensive coverage premium costs. Going to a $1,000 deductible may save you even more! Most homeowners and renters insurers offer a minimum $500 or $1,000. Raising it to more than $1,000 can save on the cost of the policy.  But remember, that in the event of loss you’ll be responsible for the deductible, so make sure that you’re comfortable with the amount chosen.

Do I have to pay a deductible every time I make a claim?

You won’t always need to pay a deductible. Here are some examples:

  • If your deductible is $0, you won’t have to pay for any portion of your approved repairs or settlement amount.
  • Some policies will waive it when certain circumstances apply, such as the claim amount exceeds a condition stipulated in the policy. When your total claim hits a certain dollar value, for example, you might not have to pay it, (i.e. A fire damage claim for $20,000 in repairs, but it doesn’t apply if more than $10,000).

Are they necessary?

You may be wondering why insurance companies build deductibles into their policies in the first place. In a nutshell, they exist to keep insurance as affordable as possible.

Here are just a few ways they work to save you money in the long run:

  • Deductibles help prevent fraudulent claims and reckless behaviour: Purposefully damaging property or acting recklessly is reduced when there is a monetary consequence for doing it, like a deductible payment. Without them, false claim payouts could lead to higher premiums for everyone who has insurance.
  • They help to prevent minor claims: Deductibles eliminates the need for processing thousands of small claims that would burden the industry and result in higher costs to process all claims, which overall, helps keep minor claims at bay.
  • Keeping more money in your pocket: When you set your deductible, you’re agreeing to either fully cover those smaller claims or cover a portion of your repair costs for larger claims. When your insurer doesn’t need to invest in processing those smaller claims or paying the full amount, they’re able to share those savings with you through lower premiums.

How much should it be?

Depending on your insurer, you can typically choose a rate from $250, $500, $1,000, or $2,000. If given the opportunity, you can choose the car insurance deductible that best suits your financial situation. Remember: the higher the amount, the lower your premium.

What’s a disappearing deductible?

A disappearing (or vanishing) deductible is an endorsement you can add to your policy, which reduces the stated amount by 20% for each consecutive year of claims-free driving. In theory, after five years, there is nothing to pay unless you make a claim, but you’re still paying for the endorsement.

Does it apply if I have accident forgiveness?

Yes, you still have to pay your stated amount, even if you have purchased accident forgiveness. As an endorsement or add-on to your car insurance policy, accident forgiveness promises to not increase your premium after an at-fault claim. However, it has to have been purchased prior to any accident.

If you switch insurance companies, the accident forgiveness endorsement doesn’t follow you. It’s also typically only available to people who haven’t submitted a claim in six years.

How do zero deductibles work?

You can buy an endorsement for glass coverage, which means there is no deductible to pay for a broken car window or windshield replacement. You might also see zero deductibles with car rental insurance. Depending on your credit card (and if you have rental car coverage) you likely don’t need the insurance. Check with your isure broker and credit card provider before buying any insurance from a rental company.

If you can afford to pay a higher deductible when making a claim, then take the opportunity for a cheaper premium. Otherwise, find a balance in your car insurance deductible that makes sense for you. As always, isure is here to assist with all of your insurance-related needs and questions.

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