Have you looked through your insurance policy and felt like you were reading another language? Understanding insurance terminology might seem intimidating, but we’re working on changing that.
Let’s break down the deductibles.
What is an insurance deductible and how do deductibles work?
In your insurance policy, the deductible is the amount that you agree to pay out of your own pocket before your insurers step in and pay the remaining balance of your claim (up to the limit in your policy).
Picture this: A tree branch falls on the roof of your car, and the repair bill is $1,500. If your deductible is $300, you’ll pay $300 to the repair shop and your insurer will pay the remaining $1,200. If your car is totalled or not worth repairing, your insurer may pay you the actual cash value of your car instead. this case, your deductible would be subtracted from the total amount of the loss.
Do I have to pay a deductible every time I make a claim?
Not necessarily:
- If your deductible is $0, you won’t have to pay for any portion of your approved repairs or settlement amount.
- Some policies will waive your deductible when certain circumstances apply. For example, when your total claim hits a certain dollar value, you might not have to pay your deductible.
- After a fire, you make a home insurance claim for $50,000 for repairs. Your deductible is $1,000, but your policy states that this deductible doesn’t apply if a single claim adds up to more than $25,000. In this case, since the claim is more than $25,000, you don’t have to pay your deductible.
- Some policies have different deductible amounts for different types of coverage, which means that you may or may not have to pay, depending on the coverage you use for that specific claim. And, if your insurer determines that your claim will be covered by more than one section of your policy, they’ll do the math and determine how much of your deductible you’ll need to pay.
Why do deductibles exist?
Now, you may be wondering why insurance companies build deductibles into their policies in the first place. Deductibles exist to keep insurance as affordable as possible.
Here are just a few ways deductibles work to save you money in the long run:
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- Deductibles help prevent fraudulent claims and reckless behaviour. If insurance policies didn’t have deductibles in place, some people could be tempted to damage their own things or act recklessly (two behaviours known as “moral hazards” in the insurance world) just because they knew their insurer would protect them. This becomes less tempting when they know that part of the repair bill will come out of their own pocket. Over time, false claim payouts can lead to higher premiums for everyone who has insurance, and implementing deductibles is just one way of preventing those fraudulent or false claims.
- Deductibles also help prevent minor claims. If an insurance company had to process a $150 loss and subsequent claim, they would need to employ more people, and that could drive up the cost of insurance, since the cost of processing these small claims would far outweigh the actual insurance payout. Deductibles help keep minor claims at bay.
- Deductibles help keep your money in your pocket. When you set your deductible, you’re agreeing to either fully cover those smaller claims or cover a portion of your repair costs for larger claims. When your insurer doesn’t need to invest in processing those smaller claims or paying the full amount, they’re able to share those savings with you through lower premiums.
How do I know if I’ve chosen the right deductible?
The best way to figure out if your deductible is right for you is to ask yourself one simple question: Would you be comfortable paying the deductible amount out of your own pocket if you made a claim today? If you choose a lower deductible, you’ll be responsible for less of the bill if you make a claim, but the cost of your insurance could be a little higher. On the other hand, if you choose a higher deductible, the cost of your insurance will likely be lower, but you’ll be expected to pay the deductible if you make a claim.
Going with a higher deductible could lower your insurance premium, but ask yourself if you’d be comfortable paying the deductible amount out of your own pocket if you made a claim today.
Note: With auto and strata unit owner policies, the rules and regulations can vary by province, and claims are handled according to the location where the claim occurs. That means the amount you need to pay for your deductible could be different if you’re involved in an accident outside of your home province.
