An insurance deductible is among the most significant aspects of insurance which everyone should understand prior to choosing their policy. The meaning of an insurance deductible translates to the amount of money that must be paid as expenses before the insurance company pays a claim . Or in other words, the insurance deductible is basically the amount that is 'deducted' from your insured loss.
As a vital aspect in the insurance industry, deductibles represent the shared part of the risk between the policyholder and the insurance company. For example, if you need repairs to your home or are replacing some of your possessions, the amount of the deductible will come out of your own pocket.
How are insurance deductibles related to insurance premiums?
Basically, an insurance deductible can take two forms: a dollar amount or a percentage of the total amount of the insurance policy. In most of the cases, the larger the deductible is, the less the policyholder will pay for the insurance premium. However, every consumer should read about their deductible amounts before signing a contract.
Here are two simple examples on how insurance deductibles work:
If you have a $500 deductible in the form of a 'dollar deductible', it means that $500 would be paid out of pocket for your claim. Therefore, in case of an accident or any situation where your insurance may apply, if the loss is worth $10,000, you would receive a check for $9,500. The formula is simple; the deductible is your participation in the total payout.
With a percentage deductible, the insurance deductible is based on a percent of the value. For example, your house is insured for $1,000,000 with a 15% earthquake deductible. In the case of an earthquake or damage in which causes $1,000,000 in damage, the deductible would be $150,000.
In the end, everyone should know that insurance deductibles vary in many parts. For example, in hurricane and earthquake zones where there is a risk of a major catastrophe, only special deductibles may apply for those claims. These special deductibles can drastically effect the amount payable in a claim and should be discussed prior to purchasing a policy. Working with an insurance broker who understands your situation is critical to a good insurance policy.
What do you think?
The Base Team
Insurance made easy. How we can make insurance better for you?