As a consumer buying insurance cover, the amount of your deductible is an important issue. A deductible is an amount of money that a policyholder must personally pay before insurers pay out the remainder of a covered claim. For example, a driver with collision insurance that has a $2,000 deductible should cover the first $2,000 of repairs before the insurer pays the rest of the money to repair or replace the vehicle.
Insurers offer policyholders the choice of their deductibles. Coverage is available with a high deductible, which usually has low premiums. Policyholders assume more risk of future costs with this type of policy. Alternatively, policies with low deductibles are also an option, but the premiums are usually higher.
Each consumer should carefully consider which option best suits their needs. In many cases, however, a policy with a large deductible is a good choice. Here’s why.
The simple reason why large deductibles can make sense to many consumers
Large deductibles may make sense to many consumers because of the premium savings they provide. Although a high deductible policy means that a consumer could have to pay more if something goes wrong, the policyholder benefits from guaranteed reduced premiums for the duration of the cover in place. And for consumers who can be strategic about how they manage those savings, they may end up effectively getting the same protection that a lower deductible policy would provide – without the added costs.
To understand how this can happen, let’s say for example a home insurance policy with a deductible of $1,000 saves 25% compared to a policy with a deductible of $500. This could mean that a homeowner has the option of paying $1,500 per year for a policy with a $500 deductible or $1,125 per year for a policy with a $1,000 deductible.
This owner would save $375 per year or $31.25 per month by choosing the policy with the higher deductible. Over the course of 16 months, the policyholder who chose the plan with the $1,000 deductible could save the extra $500 they would have to pay if something went wrong with the property.
Saving money and not making too many claims is crucial
If they put that $500 in a special account to cover any additional costs they would be responsible for, then they would only have to find another $500 if they had to make a claim – the same amount they would have to with the reduced deductible scheme.
From then on, the extra $31.25 per month could be diverted to other things, leaving them better off than if they had the most expensive insurance coverage. So as long as they didn’t have to make a claim on their home insurance more often than every 16 months, they would be fine.
Of course, policyholders should make sure they have the money saved to cover out-of-pocket expenses if they opt for a high-deductible plan. But it often makes sense, as it can lead to lower expenses over time.
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