Insurance Deductibles: What You Need to Know

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Insurance Deductibles: What You Need to Know
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To stretch your insurance dollars, choose the deductible that's right for you.

When you purchased your new car or closed on your home, did you pick your home and auto insurance deductibles quickly, giving them little thought?

If so, that haste could come back to cost you. Deductibles are one of the most important parts of any insurance policy. In addition to affecting how much money you'll receive when you file a claim, they also influence how much you pay in premiums.

Here's what you need to know about insurance deductibles so you choose the one that's right for your budget.

What Is a Deductible?

When you experience a loss that's covered by your insurance policy, the deductible is the amount of the loss you're responsible for before the insurance pays. For example, let's say you're in an auto accident and the cost to repair your vehicle is $1,200. If you have a $500 deductible, you're responsible for the first $500 of the repair cost and your insurance company will cover the remaining $700.

Generally speaking, deductibles only apply to property coverage, not the liability protection that provides benefits when you're found legally responsible for injuries to other people or damage to their property.

"Deductibles share the financial risk of loss between you and the insurance company," says Mark Ginther, assistant vice president of property and casualty underwriting at USAA. The more risk you're willing to take on yourself through a higher deductible, the lower your premium.

Homeowners Deductibles

While auto insurance deductibles tend to be pretty straightforward, homeowners insurance deductibles are more complicated. Here are the names of deductibles you may encounter.

Percentage deductible. Most of us think of deductibles as a specific dollar amount, but many deductibles on homeowners policies are stated as a percentage of the home's insured value. For example, if your home is insured for $200,000 and your homeowners policy has a 1% deductible, you'd be responsible for $2,000 before insurance benefits begin. If the insured value of your home rises, your deductible will rise with it.

Split deductible. Especially if you live in a catastrophe-prone area, you may find your homeowners policy has multiple deductibles that differ depending on the peril. For example, you may have one deductible for wind and hail and another for other risks.

Flood insurance deductible. Homeowners policies don't cover floods. To cover that risk, you'll need to buy a flood insurance policy from USAA through an arrangement with the National Flood Insurance Program. When you do, you'll have the option of choosing one deductible for your structure and another for your possessions.

Choose Your Deductible Wisely

There's a natural tendency to lean toward a lower deductible. Who wouldn't like their insurance company to pay more money at claim time? Carrying a very low deductible, however, can be pricey. Remember, in general, the lower your deductible, the more you'll pay for coverage.

"As you contemplate your decision, keep in mind that insurance is designed to protect you from a financial setback, not cover small losses that you can afford to pay," says Ginther.

Given the trade-off between deductibles and premiums, you may want to avoid extremes in either direction. If you set the deductible as low as possible, you'll increase your ongoing premium. Set it too high, and you may struggle to cover your part when something goes wrong.

Ginther has a common-sense guideline for this decision: Set your deductible at the highest level you can comfortably afford to pay out of pocket expenses without significantly impacting your financial plan.

Having money on hand for unpleasant surprises is exactly what an emergency fund is for. If you've already saved a substantial amount of cash, you may feel more comfortable with a higher deductible. On the other hand, if you're still building your rainy-day fund, you might start with a lower deductible and increase it as your savings account grows. Ginther recommends including the amount of your deductibles in your emergency fund.

But remember, someone else may have a say in setting your deductible.

"If you've borrowed money to buy your car or home, your lender may require that the deductible not exceed a certain amount," says Ginther. In addition, the available minimums may differ by insurance company and state.

If you are financially able, raising your deductibles can result in a large savings over time. We have our deductibles at the maximum available levels and I am happy with it. I'm not going to make a small claim anyway, so I might as well take advantage of the lower rates that come with a higher deductible.

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