What deductibles are, how they work, and how they’re calculated

Insurance policies can help reduce your risk of undergoing a serious financial loss when something happens to your car or your home– but they don’t cover absolutely everything. To get a payment from your insurance firm, you’ll have to share a little in the risk of the loss– usually by paying a deductible.

In many cases, a deductible is simply “deducted” from an insured individual’s payment after a loss. Some deductibles are a specific amount, such as $800 or $1000, or are calculated as a percentage of the entire amount of the insurance policy.

Percentage deductibles vs. set rate deductibles

If, for example, you have a percentage-based deductible for your homeowner’s insurance policy, the amount of the deductible will be a certain percentage of the complete amount that the insurance policy will cover. For example, if you own a $500,000 home that is fully insured (i.e. $500,000 insurance policy,) and your deductible is 1%, $5000 would be taken, or “deducted” from the full amount of your insurance claim payment.

That means that if your home sustained $20,000 in damage during a hurricane, your insurance company would pay $15,000 ($20,000 of damages claimed minus the $5000 deductible). However, in the specific case of hurricane damages, many insurance companies now charge a special, larger deductible when addressing damages caused by these destructive storms.

Increasing your deductible may allow you to save money, but could leave you open to greater financial risks

If you’re trying to save money on your homeowners or auto insurance policy–or are having trouble affording the policy you currently have, upping your deductible is usually a surefire way to reduce your rates. This is especially the case for auto insurance policies; a small increase in deductible (usually a few hundred dollars) can often reduce your auto insurance rates by up to 25 or even 30%.

However, it’s important to understand that you are making a tradeoff, and increased deductibles are less expensive for a reason. While you might have the same amount of ‘coverage,’ you are increasing your own financial risk and the amount you’ll have to pay if an accident or disaster occurs. Therefore, it’s usually only a good idea to increase your deductible if you know you’ll be able to handle the increased costs out of pocket, or if you simply cannot afford the current costs of your insurance policy.

Deductibles are often calculated based on the potential risks of an accident or other disaster occurring

For those interested in buying a new home, it may be useful to note that homeowner’s insurance deductibles are often significantly higher in areas that are prone to natural disasters, such as earthquake, tornado, hurricane, and flood zones. Potential home buyers should always calculate the costs of a homeowner’s insurance policy before making a final decision on a home– otherwise, they might get themselves into an unsustainable financial situation with more expenses than they expected.

In some cases, homebuyers may wish to avoid purchasing homes in coastal areas due to the increased insurance deductibles that they may encounter when attempting to buy a comprehensive homeowner’s insurance policy.

Always consider the deductible before purchasing or revising an insurance policy (or purchasing big-ticket items that may need to be insured)

Deductibles are an important part of any insurance policy– so it’s essential that you completely understand how an insurance policy’s deductibles are calculated before making a big purchase. Deductibles can be a significant cost for insured individuals, so many consumers may want to check out potential insurance prices on specific cars or homes before making a buying choice. Doing so can help many individuals more accurately calculate their expenses and better plan for a bright financial future.

To learn more about how insurance can help protect you and your family from a variety of accidents and disasters, contact Avante Insurance today for a free consultation.