What is a Deductible?

How to Set Aside Money if You Have a High Deductible

When you decide on an insurance policy, one thing you will need to choose is the amount of deductible you will want to pay. Deductible amounts vary, but understanding the advantages and disadvantages to choosing a lower or higher amount will help you make your decision on what is the right fit for your needs.

What is a deductible?

A deductible is what you need to pay first before you can be covered by your policy. The purpose of an insurance deductible is to help you save on your insurance, either in your monthly rates or if you need to file a claim later down the road. If you decide on a lower deductible, the less amount you will pay out-of-pocket if you are involved in an accident, but selecting a higher deductible may lower your monthly costs.

Here is a general overview of both types of deductibles:

Higher Deductible

The main advantage of choosing a high deductible is it will help lower your monthly costs, but you will assume more financial risk. For example, if you needed to file a claim, you would have to pay higher out-of-pocket costs for any repairs needed to any vehicles or property damaged.

Let’s say you got into a car accident and it caused $5,000 worth of damages and your deductible is $4,000. You would need to pay $4,000 to repair any of the damages before the insurance company covered your claim. After your costs, the insurance company would then pay the remaining $1,000 for repairs.

Lower Deductible

However, if you decided to choose a lower deductible, your monthly rates may be higher, but it can save you money in the end if you are involved in an accident. The main benefit is lower out-of-pocket costs if you needed to file a claim.

If you were in a car accident that resulted in $5,000 worth of damages, but had opted for a $500 deductible, you would then only have to pay $500 to repair the damages and the financial responsibility and remaining balance of $4,500 would be shifted to the insurance company. Even though you still needed to pay a portion to repair the damages, your total expense is cut significantly because you had a lower deductible.

Overall, choosing the right deductible for you can be difficult, but when considering your policy coverage, a good recommendation is to carefully weigh your budget consideration against your exposure to potential risks. There is no one-size-fits-all and whichever you decide on, make sure the deductible amount best fits your situation.