Insurance, Insurance Deductible, Insurance FAQ, Types of Insurance

How Does an Insurance Deductible Work?

Insurance DeductibleThe beginning of the New Year is not just a time to state your New Year’s resolutions (most of which will probably be broken with a few weeks), but, it is a time to begin your new yearly healthcare insurance deductible.  Your healthcare deductible, as you know, is the amount you owe for covered healthcare services before your health insurance plan kicks in and begins to pay. As an example, if your healthcare insurance deductible is $1,000.00, your plan won’t pay for anything until you’ve paid $1,000.00 out of your own pocket for covered services.  There are exceptions to the rule in that some plans pay for certain health care services before you have met your yearly deductible.  For those blessed with good health, they may never reach their yearly deductible, especially if the deductible is high, where others may have racked up doctor visits, laboratory or prescription charges and will have met their deductible early on in the calendar year.

Deductibles for health insurance are much different than that for car insurance and home insurance… sure, you must inevitably pay out of your own pocket until your deductible is met, but, the biggest difference is that the deductible does not begin anew each calendar year.  Deductibles for property damage works differently than a typical health insurance policy with its single annual deductible for the policy.  With an auto or homeowners insurance policy, the deductible applies each time you file a claim. The one major exception to this is in Florida, where hurricane deductibles specifically are applied per season rather than for each storm.

Since, most people have a basic understanding how health insurance deductibles work, let’s look at this topic as it applies specifically to car and home insurance.

Understanding insurance deductibles

Understanding each aspect of your insurance policy, from the premium amount, to each component of the policy, including the deductible, is beneficial to getting the most out of your insurance policy.

Basically, the word “deductible” is the amount “deducted” from an insured loss.  The deductible amount is the shared amount between the insurance company and the policyholder – you, the insured and policyholder, must pay the deductible amount in your policy in order for the remaining portion of the policy to cover your loss, no matter whether the loss is damage to your vehicle or home and replacement of your personal possessions either from the car or the home.

As a general rule, the insurance deductible is either a specific dollar amount or a percentage of the total amount of insurance on a policy.   When choosing a policy, if you are trying to aim for a cheaper premium, you might hedge your bets on not having a catastrophic event and thus opting for a larger deductible amount, and taking any money saved and ensuring that your policy is “rich” as to comprehensive coverage.  The deductible amount usually appears on the declarations page of all standard auto and homeowners insurance policies.

How it works

In a standard dollar deductible, as an example, if you have a $500.00 deductible, that $500.00 would be deducted from your claim.  So, if your insurance company has determined that you have an insured loss worth $10,000.00, you are responsible for the first $500.00 and your insurance company would cut you a claims check in the amount of $9,500.00.

In a percentage deductible, the amount you are responsible for is calculated differently.  In the case of house insurance, as an example, the deductible is based on a percentage of the home’s insured value.  Thus, for home insurance, if your house is insured for $100,000.00 and your insurance policy has a 2% deductible, $2,000.00 would be deducted from the amount you are reimbursed on a claim.  In recent years deductibles across the United States have slowly been rising.  For some states prone to natural disasters like hurricanes, earthquakes or even wildfires, homeowners may apply for a special deductible applicable only to damage stemming from that particular incident, like a hurricane for example.  These deductibles are generally higher and may take the form of a percentage of the policy limits.  Today some private insurance coverage is available in coastal communities at a lower price, giving a more competitive price and larger choice for consumers, as well as a broader selection of company insurance policies with a wide variety of different premiums, coverage and deductibles.

Save on premium costs

Insurance
As you are aware, raising the deductible amount allows you to either save money on the premium, or better yet, to apply those savings to obtain better insurance coverage.  In some cases, by increasing the deductible for car insurance, you can reduce the collision and comprehensive coverage premium costs by 15 to 30%.  The savings are quite worthwhile… that is, unless you have to make a claim and then you are responsible for a larger amount – it is a chance you have to gamble on.

Deductibles differ

Because insurance is state regulated and insurance companies must follow strict state laws to the letter, different policy language and the range of deductibles may vary from state to state.   When comparison shopping for insurance you should always ask about deductibles, though the typical amount for both vehicle insurance as well as home insurance is $500.00.

Deductibles and liability claims

As a general rule, there are no deductibles for the liability portion of a homeowners or auto insurance policy; they apply just to property damage.  For an automobile insurance policy, there is a deductible for the optional comprehensive or collision coverage, but not for the liability portion, while, in a homeowners policy, deductibles apply to damage to the structure of the home and/or  personal possessions, with the exception being if a homeowner is sued or a medical claim is made by someone injured in the home.

Special exceptions to deductibles

If you live in an area prone to flooding, you need to be aware that flooding is not covered by standard homeowner’s insurance policies.  It is available from some private  insurance companies, as well as the National Flood Insurance Program (NFIP) where you can choose to pick a separate policy for the structure of your home and for your personal possessions, along with a variety of deductibles.  Flood damage to a car would not be under the umbrella of this homeowner’s coverage; in this regard you need for your car to be covered by the optional comprehensive portion of an auto insurance policy.  As to potential earthquake damage, deductibles for earthquake coverage may range from 2 to 20% of the replacement value of the structure.  States with higher risk of earthquakes like Washington, Nevada and Utah, with higher than average risk of earthquakes, often set minimum deductibles at around 10 percent.  California, a state also prone to earthquakes, has a similar deductible of 15% of the replacement cost of the home.

Hurricanes and hail are two types of wind damage deductibles.  Whether a hurricane deductible applies to a claim depends on the specific “trigger” selected by the insurance company and applies when the National Weather Service (“NWS”) officially names a tropical storm, declares a hurricane watch or warning, or defines a hurricane’s intensity in terms of wind speed.  Be sure to double check your policy to ensure you understand how a hurricane deductible works before you need to make a claim.

Caveat:  if you are planning to purchase a new vehicle or home and the cost of insuring either or both is really too formidable, it may be wise to step down a bit on these coveted items and likewise the insurance will decrease to a more manageable premium.

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