How do insurance deductibles work?

First of all, let us look at what insurance deductibles are: A deductible is the amount of money that you as a policyholder will have to pay out of your pocket in an event of a loss or claim. Deductibles ensure that the burden of what you are insuring is shared by both the insured and the insurer.

Generally, there are no fixed deductible amounts; choosing a deductible amount in most cases depends on the individual. It is important to weigh your options when choosing a deductible amount. The higher the deductible, the lower the premium and the lower the deductible, the higher the premium.

You would want to look at how choosing a higher deductible in order to pay a lower premium benefits you. Consider whether or not you will be willing or be financially able to pay a higher amount when you eventually have a claim and are required to pay for your deductible.

Let us look at how insurance deductibles work in auto insurance for an example. When you purchase an auto policy, you could decide the deductible amount you want for collision, comprehensive, all perils or specified perils (these are the auto coverages that mostly require a deductible.) Amounts could be $250, $500, $1000 or higher, it is up to the policyholder to choose which option to go with.

There are circumstances with auto insurance where an insurance company might decide on the minimum deductible that a policyholder would require. For example, a company might decide that a driver who has had multiple at fault accidents must have a minimum deductible of $1000 for collision, comprehensive, all perils or specified perils. In this case, the policyholder would have no choice but to go with the required deductible amount.

At this point, you might be wondering, what does this mean for me as a policyholder?

The answer is simple, it means that, if you have a $1000 deductible for collision on your vehicle and you get into an at fault accident where your vehicle requires repairs worth more than $1000, the insurance company will require you pay $1000 out of pocket and they (the insurance company) will take care of the rest.

Keep in mind that, if a collision accident is not your fault but a third party's, you will not be required to pay a deductible, since the other party's liability coverage will cover for repairs on your vehicle.

As earlier mentioned, it is important to weigh your options before choosing a deductible amount.