10/14/2021
Insurance Deductibles. Part 1 (What is it and why does it exist)
Throughout this week I’ll post a short segment going over the different types of insurance and how you might select the deductibles which are best for your situation. For conversation purposes, I’d be interested to know and learn “How did you select your insurance deductibles?” Please post in comments as inquiring minds (probably just me though) want to know!
What is a deductible?
For those of you who’ve ever made an insurance claim you are likely familiar with this strange insurance term. A deductible in the amount of money you are responsible for when filing a claim with your insurance carrier. Deductibles vary by the type of coverage, and insurance. The deductible must always be paid “First” in a claim situation. This means, that before the insurance company pays a single penny, the deductible must be met.
Why are there deductibles?
There are a few reasons that insurance carriers include deductibles in certain types of coverage. The first is that a deductible will often discourage people from making insurance claims. Without a deductible, people would generally file claims for just about anything and everything. A claim, even if for a small amount, still costs the insurance carrier a fair amount of money. An adjuster must be assigned, the claim investigated, and of course paid. If there wasn’t a system to discourage “small” claims, the carriers would have a difficult time remaining solvent, and premiums would be much higher, making insurance unaffordable for many of us. By using a deductible, the carrier makes sure you have some “skin” in the claim, and you as the insured, will make the determination if it is really something for which you would like to be indemnified.
Another reason is that deductibles help to make insurance more affordable. Health insurance for instance, can have deductibles of up to $1500 (or higher in some cases). Often, many people won’t reach their deductible over the course of the year, which keeps the insurance companies from paying out what they collect in premiums, and are able to afford to pay the claims for those people who move beyond the deductible. This results in lower premiums for everyone, and also prevents adverse selection (People who obtain health insurance just to use it and then might cancel after obtaining the services – and thereby avoiding premium payments).
A third reason is to help an insurance carrier remain solvent in a situation where there may be a large number of claims at one time – such as with respect to Earthquake Insurance. The deductible for Earthquake insurance can be as low as 2.5%, however, it is generally around 10-20% of the value of the structure insured. This means that minor damage will generally be absorbed by the homeowner, while catastrophic coverage will be paid for. This keeps premiums affordable, and helps to ensure the insurers remain solvent in the event of a catastrophe.
There are many other reasons we have deductibles, however, this post would be longer and longer if I were to give examples. What are some of the reasons you might think there are deductibles other than what has been stated already? And how did you select your current deductibles? What factors impacted your decision when selecting a deductible?
