NYC Insurance Blog

Understanding Your Insurance Deductibles

It is important to read and understand your insurance policy carefully. If you cannot do it alone, seek help from an expert to avoid unforeseen problems in the future. Deductibles play a crucial role in insurance contracts. Therefore, if you understand how deductibles work, you can save money and get the most out of your policy.

What is an Insurance Deductible?

Insurance deductible refers to the amount you agree to pay out of your pocket before the insurance company pays the rest of the claim. Therefore, it is a way of sharing the risk between the policyholder (you) and the insurer. Whether you have renters or homeowners insurance, your policy has a stipulated deductible. The deductible for renters insurance policy ranges between $250 and $2,500, while homeowners pay over $500. Depending on the insurer or type of policy, the deductible can be specified in dollar amount or percentage. Therefore, consult with your insurance agent if you are unsure about anything. Typically, the deductible amount established by the terms of your coverage can be found on the front page (declaration) of your policy. The higher the insurance deductible, the lower the premiums, and vice versa.

How Does it Work?

If you have a dollar amount deductible, a specific amount will be deducted from your claim payment. For example, if you agreed on a $500 deductible and your insurance company has determined that you incurred a loss of $5,000, you will receive a $4,500 claim check. Suppose you bought renters insurance and chose a deductible of $500. After some time, someone breaks into your apartment and steals personal belongings worth $5,000. If your claim is approved, the insurer will pay $4,500, i.e., $5,000 policy coverage minus a $500 deductible.

Percentage deductibles are tricky, so they apply to homeowners insurance only. The deductibles are calculated based on your home's insured value. Therefore, if you insured your home for $50,000 and your policy agreed deductible percentage is 2%, the insurer will deduct $1,000 from any approved claim payment. One of the ways you can save money when shopping for an insurance policy is by raising the deductible. As a rule of thumb, inquire about the deductible options available, shop around and compare policies. Keep in mind that you are responsible for the deductible in the event of a loss. Therefore, ensure you can comfortably pay the deductible amount to avoid inconveniences. 

Why Do Insurance Companies Have Deductibles?

Deductibles are designed to make insurance policies affordable. Here are some of the reasons why insurance companies have deductibles:

• They help prevent fraudulent and risky behaviors. You will be careful if you know that you will be partly responsible for paying for damages or replacement. Some people might be tempted to act recklessly if deductibles did not exist because they have coverage.
• They discourage people from filing minor claims. While this might sound selfish, it is not. For example, if everyone filed a claim every time their car was scratched, insurance companies would employ many people, which would not be practical. Also, the cost of processing the minor claims would outweigh the repairs or replacement costs, making it impractical. The insurer won't reimburse you if the loss is less than the deductible, so there is no need to file a claim.
•  Deductibles help policyholders save money. If you set a deductible, you are legally bound to pay the amount out of your pocket to cover the claim. If your deductibleis high, your premiums will be lower because there is a high chance of not filing minor claims. Since your insurer understands this, they know you will not bother them with minor claims, and in so doing, they reduce your premiums, saving you money in the long term.

Is There Such Thing as Good or Bad Deductible?

We all have different preferences. What works for you might not work for me, and vice versa. Therefore, there is no such thing as a good or bad deductible. Be that as it may, policyholders should consult the experts to avoid making mistakes.

Firstly, consider what you can afford to pay. Your financial situation determines your budget, and this can determine the deductible you will choose. If you file a claim today and it's approved, how much can you afford to pay? It is also crucial to determine the estimated cost of your house or belongings. If you can afford it, a higher deductible is the best option.

A standard homeowner policy provides hail and wind damage coverage in the event of a hurricane or storm. Consider getting additional coverage if you live in an area prone to floods or earthquakes. These policies come with deductibles whose rules differ from standard policies. Here are key deductible ideas you need to know:

• Flood deductibles – they vary by insurer and state. They are offered in dollar amounts or percentages, and sometimes the mortgage company can specify the deductible amount to ensure you can pay for the damages if disaster strikes.
• Hurricane deductibles are usually higher than a typical homeowner's policy deductible. Most insurance companies offer hurricane deductibles in percentages to mitigate loss.
• Earthquake deductibles are only offered in percentages (2 to 20%) of the home's replacement value. The percentages vary with location and insurer. If a state has a higher-than-average risk of an earthquake, for example, Utah and Nevada, insurance companies set deductibles at a minimum of 10%.

The takeaway

Shopping around for an insurance policy can be daunting if you don't know what you want. Always research online and talk to colleagues and close friends to learn more. Understanding insurance deductibles and how they work is crucial. For example, choosing a higher deductible will save a lot of money, especially if you don't file a claim. With time, you will understand that your long-term savings (from paying lower premiums) outweigh the amount of money you would have to pay in case of a claim. If you are lucky, you might even never pay the deductible! Having a broker will help you understand your deductibles, give us a call today!

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