A deductible is a sum of money a person pays before a company will provide the benefits outlined in an insurance policy. The payments are useful for keeping the cost of insurance low. The amount varies, with lower deductibles generally associated with higher premiums. They are fairly standard on most types of policies, especially ones related to automotive or health coverage.
Purpose
The main purpose of a deductible is to prevent people from making claims when the cost associated with a loss, damage or need is fairly small. This leaves the company more time and financial resources to handle more costly claims. These fees also make insurance more affordable, because when the policy holder shares some of the claim costs, the issuer doesn’t need to charge excessively high premiums. They let consumers manipulate policy costs, as well, which enables them to get coverage without too much of a financial strain.
How It Works
When a person needs to make a claim, he first “meets” (pays in full) the deductible. The insured individual therefore has to put some of his own money forward to cover his loss, damage or need. The company then steps in to cover the rest of his costs up to the limits outlined in the policy.
As an example, if a policyholder gets into a car accident resulting in $1,000 US Dollars (USD) worth of damage and had a deductible of $500 USD, he first would pay $500 USD to the repair shop. The insurance company would pay the rest of the costs. Even though the car owner still needs to pay a portion of the repair bill, his total expense is cut in half because his payment qualifies him to receive some coverage.
It is important to note that some policies have exceptions. A health insurance policy, for example, might cover the cost of an emergency room visit even if the insured person doesn’t meet his deductible. The exceptions are always clearly outlined in the policy.
Amounts
The amount a person pays before his insurance coverage kicks in depends on the type of policy he has and the company with which he works. In many cases, it's linked to the cost of the premiums an individual pays regularly to maintain the policy. When a person opts for a low deductible, the issuer generally requires higher premiums because it is more likely that the amount will be met, forcing the business to pay out on the policy. If an individual chooses a high amount, the issuer is likely to require a lower premium, because the client has to pay more out of pocket before the insurance company becomes responsible for coverage.
Selecting a low amount can be good for some policyholders because, if something goes wrong and a claim is necessary, they don’t need to put a lot of their own money forward before the issuer will make a payment. On the other hand, the required higher premiums can go to waste if the customer never needs to make a claim. For this reason, some experts recommend that healthy individuals or those with a history of very few claims choose to pay more.
When a customer opts for a higher out-of-pocket expense, the lower premiums can reduce any immediate financial strain. More money can go to other areas of the person’s budget. The risk here is that, if the insured person assumes he will not need to make a claim, he might not set enough money aside to cover the high deductible. If something goes wrong, having to pay so much might not be possible without dipping into savings or other funds.
Calculation
Most commonly, insurance companies calculate deductibles every year or per incident. This means that the amount doesn’t necessarily “roll over” or extend throughout the life of a policy. In some cases, the deductible must be met for every car accident, even if they happen within the same year. Health insurance deductibles usually reset at the beginning of the year. It is a good idea for customers to calculate how much it will cost to pay multiple times throughout the policy to determine whether rates are truly affordable.
Policy Application and Regulation
Insurance companies can require these out-of-pocket payments on just about any type of policy. They are fairly standard, however, on both health and automotive policies, and their commonality has led to industry and legislative regulations designed to protect the consumer in many places. Not all policies include deductibles, however, with many health maintenance organizations (HMOs) not using them.
