What’s an Insurance Deductible?
A deductible is the amount that you have to pay toward repairs when you file an insurance claim. The deductible is a set dollar amount, determined at the time you buy your policy — and it stays the same no matter how big claims are. So if your car insurance deductible is $500, you’d pay $500 out of pocket before your insurance kicks in, whether the total repairs cost $600 or $6,000.
That’s good to know, but how do claims work? It helps to understand the claims process before tackling deductibles. Start with our FAQ on insurance claims if you’re feeling a little bit lost.
How Deductibles Work
First, you file a claim and your insurer determines how much repairs will cost. Then you pay your deductible and the insurance company makes up the difference. For example: If your home insurance has a $1,000 deductible, and a snow storm causes $3,500 worth of damage to your roof, you’ll have to cover $1,000 before your insurer foots the remaining $2,500.
How Deductibles Affect Claims
Recall that your deductible is a predetermined dollar amount that doesn’t change, regardless of claim size. This is great news when it comes to big-ticket repairs ($500 for a $4,000 transmission replacement? Sign us up). But it also means that it’s not always in your best interest to file a claim.
To help you understand why, here’s a little background on the insurance industry: Every claim you make — whether for auto or homeowners insurance — goes onto your personal insurance record. The more claims you have on record, the more “risky” you look in insurers’ eyes. That means you’ll end up paying more for your coverage in the future.
Keeping this in mind, it only makes sense to file a claim if the total cost of damages is significantly higher than your deductible amount. Filing a $650 claim with a $500 deductible, and saving $150 off the top, likely isn’t worth the red mark on your insurance report.
How Deductibles Affect Insurance Rates
The rule of thumb for deductibles is: The higher your deductible, the lower your premium. Why? Because when you opt to pay more out of pocket, you’re helping to minimize the “risk” of insuring you. The provider cuts you a deal because they won’t have to fork out quite as much money if you do file a claim at some point.
How Much Can A Higher Deductible Save Me?
Choosing a higher deductible will earn you a percentage saving on your homeowners or auto insurance. The actual discount varies by company, though a few studies estimate that customers save around 10% on average by upping their auto deductible from $500 to $1,000 (the two most common options).
That said, choosing a higher deductible to cut premium costs isn’t always the way to go. It’s helpful to think about the deductible as a lump sum, out-of-pocket expense you’d have to pay all at once if something happens to your home or car.
Consider whether a $1,000 deductible or higher would take an uncomfortable bite out of your bank account. Then, compare that to the actual amount you could save by raising your deductible. If your monthly car insurance payment is $85, for example (right in line with the national average), you’d only save around $8 per month by upping the deductible. That discount might not be worth the added risk of a higher out-of-pocket cost.
Average Car Insurance Deductibles
Car insurance deductibles are usually $500 or $1,000, and come with policies that include collision and comprehensive coverage. These are the add-ons that cover repairs your own vehicle after it’s damaged — as opposed to liability coverage, which pays for the other person’s repairs.
Liability insurance does not include a deductible. This means that if you’re found to be at fault in an accident, and your insurer has to reimburse the other party for damages, you will not be on the hook for an out-of-pocket payment.
Average Homeowners Insurance Deductibles
Homeowners insurance deductibles can be expressed two different ways: either as a dollar amount (usually starting at $500 or $1,000), or as a percentage of your home’s insured value. In that case, if your home were insured for $250,000 and the deductible was set at 1%, you’d be required to pay $2,500 out of pocket toward any given claim.
Homeowners insurance deductibles apply to all claims, but you might have a separate, higher deductible for certain disasters (like winter storms or hurricanes). See our homeowners insurance buyers guide for more information.