Insurance policies may seem like they’re written in another language. Yet it’s important to understand the terms so you can get the most out of your coverage. Here’s a quick tutorial on deductibles and what they mean for your auto and home insurance.
What is a deductible?
Simply put, a deductible is the amount of money that you pay out-of-pocket before insurance kicks in. Generally, your insurer deducts the deductible amount from the payment that they make on your claim. You can find the deductible listed on the declarations page, which is the front page of your policy.
Example: If the cost of a repair is $1,500 and your deductible is $500, insurance will cover $1,000.
Unlike health insurance deductibles, you do not have to reach an annual amount in an auto or home policy before insurance will pay. Each time you file a claim, there is a deductible (if it applies). One exception is the state of Florida where hurricane deductibles are once per season.
High vs. Low Deductibles
You select your deductible from a range of choices provided by your insurer. If you choose a lower deductible, that means your insurer will need to cover more in the event of a claim, which will raise the cost of your policy. If you choose a higher deductible, you’re willing to cover more of the cost in a claim, and that will lower your premium.
Lower deductible = Higher insurance premium
Higher deductible = Lower insurance premium
It’s important to note that you will have to pay the deductible if a loss occurs in a car accident, even if you think the other driver is at fault.
You may think twice about filing a claim for a damage amount that is close to your deductible. For example, if your deductible is $1,000 and repairs are $1,250, it may not be worth it. You’d be responsible for the bulk of the repairs, and by filing a claim, your rates may go up when you renew. See our blog about when you need to file a claim and when you don’t.
Auto Policies & Deductibles
There are different types of coverage available to you for your vehicle. Some may be mandated by your state or your lender, and others are optional. Not all coverages carry a deductible.
The following coverages include a deductible, and you may choose a different deductible amount for each one:
- Collision: This coverage kicks in when you collide with another car or object.
- Comprehensive: This coverage is for damage from other causes such as hitting a deer or having a tree fall on your car.
- Uninsured motorist property damage (UMPD): This coverage is for property damage from accidents with another driver who is uninsured and at fault. UMPD may or may not have a deductible; it depends on the state and the type of loss. (Uninsured motorist coverage, which is different than UMPD, does not have a deductible.)
- Personal injury protection (PIP): This coverage pays for medical expenses regardless of who is at fault.
Pro Tip: Being able to set a deductible for each type of coverage allows you to assess the likelihood of your needing that coverage. For example, if you live in the country and might be more likely to encounter a deer than another car, you can lower the deductible for comprehensive and raise the deductible for collision.
There is auto coverage that does not carry a deductible, and that’s liability coverage. With liability coverage:
- If you are at fault: You hit another car and cause property damage and/or driver injuries. Your liability covers the damage to the other driver and his/her car without requiring a deductible. However, your own collision policy pays for damage to your car, which would come with a deductible.
- If someone else is at fault: Another driver hits your car and/or injures you. Their insurance will pay for damages and medical expenses. There are no deductibles.
Your insurer can provide quotes for different levels of deductibles and work with you to determine the best coverage for your budget.
Homeowner’s Policies and Deductibles
Whether you’re buying a new home, or you’ve owned yours for years, your homeowner’s policy protects your investment. Costs vary by location, age of home, construction type, number of bathrooms, and many other factors.
With homeowner’s insurance, there are generally three choices for deductibles:
- Flat deductibles: You would choose a fixed dollar amount, such as $1,000. That is the amount you would pay out-of-pocket before insurance kicks in.
- Percentage deductibles: You would choose percentage of your Coverage A limit. If your policy covers your home at $300,000, and you choose a 2% deductible, you would be responsible for 2% of $300,000 or $6,000.
- Peril-specific deductible option: You could have a flat deductible amount and then carry a different one specifically for wind/hail losses.
There are coverages under your home insurance that do not carry a deductible. These include Scheduled Personal Property (SPP) Coverage, Coverage E: Personal Liability, and Coverage F: Medical Payments to Others.
- Scheduled personal property (SPP) Coverage is for items that have higher values above your personal property coverage limits. This includes heirlooms, watches, jewelry, instruments, furs, or anything about which you are especially concerned such as a special guitar. (Musical instruments for example do not have a contractual limit but you will want to schedule an instrument that is special to you.) SPP offers much broader coverage for your precious items – if you lose a set of earrings, they are covered; if a diamond falls out of a ring, or if a guitar falls off a shelf and gets stepped on, they’re covered. There is no deductible if the covered items are stolen, lost, or damaged. Insurance pays the lowest of the four options: repair, replace, actual cash value or the amount of insurance.
- Personal Liability protects you if a claim is made or a suit brought against you for bodily injury or property damage caused by an occurrence to which coverage applies. These are expenses paid to third parties for their injuries and damages. Liability covers you at your place or anywhere in the world. If you are found liable, the policy will pay up to its limit of liability for damages for which an insured is legally liable. This can include medical expenses, lost wages, pain and suffering, and permanent scarring. The policy also provides a defense in court, if needed, for the policyholder. This is at the insurance company’s own expense.
Insurance may seem complicated, but it doesn’t have to be. Your agent can answer any questions you may have. Contact your insurer to find out more about protecting your most valuable possessions.
This article is furnished by California Casualty, providing auto and home insurance to educators, law enforcement officers, firefighters, and nurses. Get a quote at 1.866.704.8614 or www.calcas.com.