Paycheck Chronicles

High Insurance Deductibles Make Sense (and Cents)


With many types of insurance, the insured is responsible for a insurance deductible.  A deductible is the amount of expense that must be paid out-of-pocket before the insurer will pay any expenses.  Having a high deductible can keep your insurance costs lower.

The logic behind an insurance deductible is that the insured should have a vested interest in preventing claims from happening, or minimizing damage or losses when they do occur.  They are also used to deter insured parties from making claims that they could reasonably be expected to cover.  By only covering larger events, the insurer can expect to have fewer claims, which results in lower premiums on the policies.

When setting up any type of insurance, or reviewing your policies, you have to choose what deductible amount you wish to have.  Deductibles may be a fixed dollar amount, such as $1,000, or a percentage of the policy coverage, such as 2%.  Your choices need to consider your likelihood of making a claim, your ability to cover smaller losses, and your overall philosophy of insurance.

When counseling individuals, I typically recommend that they choose deductibles at the high-end of their comfort zone.  For example, if a homeowner's policy offers a $500, $1,000, $2,000, or $3,000 deductible, and the person is wavering between the $1,000 and $2,000 deductible, I encourage them to take the higher deductible.

Higher deductibles keep  your overall insurance costs in two ways:  with lower premiums now, and decreasing the chances that your premiums will go up due to claims.

Because higher deductibles mean fewer claims, insurers are able to offer lower rates on their premiums.  The difference in price can be just a few dollars or it can be a lot of money.

More importantly, when you have a higher deductible, you're less likely to be tempted to make smaller claims.  This is where the real savings happens, because every claim that you make can impact your overall policy costs.  More importantly, if you have multiple properties or policies, a claim against one policy can impact your costs on all your policies.   From a cost-management perspective, you never want to make an insurance claim that you can afford to cover.  Having a higher deductible encourages exactly that behavior.

Of course, having a higher deductible means that you must have the savings to cover potential losses.  Depending on how you manage your money, you may consider keeping a separate savings account just for your insurance deductibles.  You can add to this account with the savings from lower premiums, and hopefully eventually you'll have enough to raise your deductible even more.

Even though the premium difference between a lower and higher deductible might not seem like a lot, the amount can really add up over a lifetime of insurance programs.

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