How does a deductible work? What is better, a high deductible or a low deductible?
When you take out an insurance policy you might chose the deductible, the amount you cover. Whether it’s higher or lower may or may not save you money.
Any time you take out an insurance policy for your home, car or health, you will generally will have to set the deductible amount. This is the money that will come out of your pocket before the insurance company will kick in their share.
Depending on your situation setting it higher or lower could save you money through either lower premium payments or smaller out-of-pocket payments when you need to make a claim. We’ll take a look at how deductibles work and how the size can affect the amount the insurance policy you chose will cost.
How does a car insurance deductible work?
Depending on the type of insurance, deductibles vary. In the case of car insurance it will generally be in a dollar amount. The two most common types of auto insurance are comprehensive and collision. However, you may be required by your state to carry personal injury protection or uninsured/underinsured motorist property damage.
Deductibles for all types of car insurance work the same. You will have to pay a deductible for each claim. So say that you make a $2,500 claim and you deductible is $500, you pay that amount to the mechanic or body shop and the insurance company will pay whoever did the work the remaining $2,000.
As you pay your part first, let’s say if your deductible is $500 again and the repair work cost $300, you wouldn’t bother filing a claim. Since the amount is lower than your deductible, there is no need to go through the hassle of doing any paperwork.
How does a home and renters insurance deductible work?
Homeowners and renters insurance work in a similar way to car insurance, and there are policies that cover different disasters that may befall your house. Deductibles can be a fixed dollar amount or a percentage of the price of what you are making the claim for. Again, you will have to pay the deductible amount first, which will be applied to each claim, and the insurance company will take care of the rest.
Depending on the policy certain things may be covered automatically, on a limited basis, that do not have a deductible like having a locksmith open your door in the event you get locked out. Others might cover your appliances similar to an extended warranty sending a technician for free. Check what policies exist.
How do health insurance deductibles work?
Health insurance comes with a deductible, but generally for a year’s worth of coverage. That means that once you’ve spent out of pocket your deductible amount then the insurance company will start covering your medical bills. At the end of the year when you renew your coverage, the deductible resets.
Certain things like preventive care and other medical services may be covered by your insurance straight away without you having to spend money out of your pocket.
Higher or lower deductible?
The higher you set the deductible, the lower your insurance premiums will be and vice versa. However, you must take into account how often you’ll be using the insurance policy and what you’ll need it for. If you are constantly paying out large sums of money because the deductible is too high, you will pay more in the long run. However, if you have a low deductible but are constantly making claims, the insurance provider may increase your premiums as you are costing them more money.
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