“If you want lower premiums, just raise your deductible!” We hear this advice all the time, and—while it’s coming from a good place—it’s not good advice as a blanket statement. Raising your deductible can lower your premium, but it could also land you in economic trouble based on your own financial situation. It’s the right move for some people, but not for everyone.
What are the benefits to carrying a high deductible on your home, auto, and other insurance; and is raising your deductible the right decision for your assets and family?
What is a deductible?
A deductible is the amount you have to pay out of pocket when you submit a claim before your insurance will step in to cover the remainder, up to your coverage limits. Deductibles usually apply to most coverage types on your home, auto, boat, motorcycle, flood, and other insurance types except for liability.
Let’s say, for example, you have a $500 auto collision deductible (Auto collision insurance covers your car’s damages if you get into a collision with another car or object, regardless of fault.) Another car slams into the back of your car. Thankfully, no one’s hurt, but your car has $4,000 in repairs due to that collision. You would be responsible to pay the first $500 of your deductible, and your collision coverage would pay the remaining $3,500 (up to your collision coverage limits).
However, if there is only $450 in damages to your car, your insurance company wouldn’t pay any of it because the claim is worth less than your deductible. That means that if you had a $1,000 deductible, you wouldn’t get paid out for any claims that are less than a thousand dollars. In those cases, it’s best not to even submit a claim if it’s less than your deductible so you don’t change your “riskiness” in the eyes of your insurer.
In most cases, your insurance will have an all-peril deductible. This means you’ll have the same deductible for all types of claims, whether it’s theft, storm damage, or another covered event. However, there are some instances where you’ll have a separate deductible for certain claims, like hurricanes. You’ll likely also have a separate deductible based on the policy, like if you have earthquake or flood insurance that is separate from your homeowners’ insurance, the deductibles could be different.
Three types of deductibles
Your deductible will be expressed in one of three ways on your insurance policy.
- Dollar amount: This is the exact dollar amount ($$) you have to pay before the insurer pays their portion. This is the most common type of deductible for home, auto, etc.
- Percentage: The deductible is expressed as a percentage of your policy’s total coverage amount. For example, if your home is insured for $300,000 and your deductible is 2%, your deductible would be $6,000. Take note of percentage deductibles as they seem low, but they might actually be quite high. Percentages are more common for specific insurance types, like flood or earthquake.
- Split: You have a basic dollar amount that applies to most insurance claims, but then certain events—like hurricane or earthquake—will trigger a percentage deductible instead.
Deductibles are not cumulative
In this article, we’re talking about home/renters/condo, auto, boat, and other types of property and casualty insurance. This does not apply to health insurance. Unlike health insurance, which has an annual cumulative deductible, home and auto deductibles apply to every claim you make. So, if your home is particularly prone to wind damage, for example, you’d have to pay your homeowners insurance deductible every time you submit a wind claim.
Note that some states have laws that only allow one deductible for the season for a particular risk. Florida, for example, only allows one hurricane deductible per year and your insurance will cover the remaining covered claims for any additional storms (up to your limits).
Why does a higher deductible mean a lower premium?
A higher deductible means you’re assuming more of the risk. If your deductible is $1,000 instead of $500, you’re responsible for $500 more in the case of an incident. This means that you hold more of the financial risk, and it also means you won’t submit a claim for anything less than $1,000.
Thus, a higher deductible means you have to pay more per claim and you’re less likely to submit smaller claims to your insurance. Both of these make you less of a risk to your insurer, so your insurance company often meets this lower risk with a lower premium. Insurance companies essentially use deductibles to reduce minor claims, so insurance is used primarily for the “big” and potentially financially-devastating events.
Although a higher deductible means your premiums will go down, it’s not always proportional. It’s not like raising your deductible by $500 will lower your annual premium by $500. Still, a higher deductible can reduce your payments by 20-40%, which can be a substantial amount for certain insurance policies.
Still, keep in mind that you have to pay that deductible every time you make a claim, so you’d need to pay that dollar amount (or percentage) before your insurance will even kick in; you’ll need to be able to afford your deductible multiple times over. That’s why the concern of raising your deductible is in question—does it make financial sense in the short-term and the long-term?
Should you raise your deductible?
When deciding your deductible, you’ll want to think about your personal financial situation. What works for your friend or uncle may not be right for your unique needs. That’s why we always recommend talking to an InsuraMatch agent to ensure you have the right coverage at the right price with a deductible that works for you.
What are the factors to consider when thinking about raising your deductible?
1. Can you afford the deductible out of pocket?
The deductible is what you are responsible for paying out of pocket. If you are financially well off and could pay that deductible for every claim, you could raise your deductible to save money in lower premiums. If you would have trouble meeting that deductible comfortably for a claim—or multiple claims—then you may want to lower your premiums. Choose a deductible that you can afford to pay out of pocket without stretching yourself thin.
Some people choose to raise their deductible and then set aside an emergency fund with the deductible amount in it. This could be the right solution if you are at a low risk of submitting a claim and want to reduce your premiums, but you’ll still be covered if something happens.
2. What is your risk?
If you are at a low risk of submitting a claim, raising your deductible may not be a huge deal. For example, if you want full coverage for your automobile but you only drive once a week to get groceries, you may be able to raise your collision insurance deductible. You don’t drive a lot so your risk of a collision is lower.
In reverse, if you’re at a high risk of submitting a claim, a lower deductible is probably more manageable—especially if you could have multiple incidents and claims in succession. For example, if your home is in tornado alley, you may want a lower homeowners deductible, so you don’t have to pay a high deductible out of pocket any time high winds roll through.
3. How much will you save in premiums long-term?
A higher deductible means you’re saving money on your premium. We recommend that you create an emergency fund with that saved money from your remium, so you can have enough money set aside to meet your deductibles in the case of an accident. For example, let’s say you save $10 a month by raising your auto deductibles from $500 to $1,000. In one year, you’d save $120. Put that $120 away in your emergency fund to help pay for that higher $1,000 deductible.
You’ll want to balance savings with risk. If you’re at a lower risk of submitting a claim, this save-and-see method can work well over the long term. But if you’re likely to make a claim in the next couple years, you could end up losing money.
4. Can you adjust some deductibles and not others?
In some cases, you can raise one deductible and lower another to offset the costs. For example, some of our clients keep a higher comprehensive deductible and a lower collision deductible if they don’t drive their car often. This may not work if your insurance is all-peril, meaning your deductible is the same for all incidents, but you can talk to your insurance agent about balancing multiple deductibles based on your risk.
5. Are you going to submit smaller claims?
If you have a $1,000 deductible and your damages are worth $900, you won’t get paid out by your insurance company. Insurance only steps in after your deductible amount is paid. So, you can’t (and shouldn’t) submit claims that are lower than your deductible. If paying $800 out of pocket for damages to your car, for example, would hurt your finances, you wouldn’t want a $1,000 deductible. You’d want a $500 deductible or lower (if your insurance company has a lower minimum), so your insurance company would help pay for your damages.
Keep in mind that every claim you submit could raise your premium costs. Strongly consider how often you would need to submit a claim, then choose your deductible accordingly.
6. Is there a disappearing deductible?
Some insurers offer disappearing deductibles. This means that if you haven’t filed a claim in a few years (usually three years), they may lower your deductible without changing the cost of your premium.
For example, in 2016, you purchased an auto policy with a $1,000 comprehensive deductible. You haven’t made a claim on your auto policy and you’ve stayed with the same insurer. After three years, they reduced your deductible to $950. By 2020, your deductible is now done to $850. But you’re still paying the lower premium rate for a $1,000 deductible.
If you don’t submit claims often and you’re loyal to an insurance company, this can be a good way to save money while reducing your deductible.
What is the right deductible for me?
You want to choose the highest deductible that you’re comfortable paying out of pocket a few times over. Don’t think of your deductible as an annual or one-time fee. Rather, you want to consider the deductible risk versus premium savings over the course of your homeownership.
Your InsuraMatch agent will help you do the math to determine what the best deductible is for your financial situation.
Are there benefits to carrying a high deductible?
Carrying a high deductible means you could save a significant portion on your premiums. Over time, these savings can rack up to create a sizeable emergency fund you could use to protect your home, car, assets, and family. The purpose of insurance is to make sure you can survive financially if something happens, not to pay for all the little things that go wrong.
Still, the best way to save on your insurance premiums is by shopping around and comparing quotes regularly. By just comparing carriers and policies and inquiring about discounts, you could save hundreds on your insurance bills every year—without impacting your finances with a deductible.
Compare quotes and save by calling one of our expert insurance advisors today at (844) 300-3364!
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