Insurance 101: Understanding How Deductibles Work

Confused about insurance deductibles? Gain clarity on how they work and when they apply to save on your home or auto insurance.
May 8, 2024 | Auto

Navigating insurance can be complex, with various terms and concepts to understand. In this article, we delve into the definition of an insurance deductible, explore the different types you may encounter, and discuss how deductibles impact your insurance premiums. Additionally, we'll offer valuable tips on things to consider when selecting the right deductible amount for your needs and weighing the pros and cons of high versus low deductibles. 

What Is an Insurance Deductible?

An insurance deductible is the amount you agree to pay for a claim before the insurance company starts covering additional costs. For example, if you have a home claim, the deductible amount is deducted (or subtracted) from the total amount of damage. Then, the insurance company pays the remaining loss up to the policy limits. Deductibles typically apply to damage to your property, not the liability portion of insurance coverage.

Types of Insurance Deductibles

Auto Deductibles 

Auto deductibles apply to damage to your vehicle and typically range from $250 to $1,000 or more. 

Property Deductibles

Property deductibles, like on a homeowners or business insurance policy, can be a little more complicated. In these situations, there are two main types of deductibles:

  • Dollar deductible: A predetermined amount, usually a minimum of $500.
  • Percentage deductible: A percentage of the insured building value.

Deductible Examples

Here are a few examples of how the different deductible options work:

  • Auto deductible: You have a $1,000 deductible for collision coverage. You backed into a concrete wall. The cost to repair the vehicle was $3,000. You would pay the $1,000 deductible, and the insurance company would pay the remaining $2,000 balance.
  • Property dollar deductible: You have a $1,000 deductible for your home coverage. Your dishwasher leaked, resulting in $6,000 in damage. You would pay the $1,000 deductible, and the insurance company would pay the remaining $5,000.
  • Property percentage deductible: You have a 1% deductible on your home insured for $350,000. A windstorm blew a tree onto your house, causing $8,000 in damage. You would pay $3,500 (1% deductible) and the insurance company would pay the remaining $4,500 in damages.

How Deductibles Affect Insurance Premiums

Typically, higher deductibles result in lower premiums because you agree to take on more of the loss. Conversely, lower deductibles generally result in higher premiums.

Choosing the Right Deductible

Ultimately, there is not a one-size-fits-all answer. Choosing a deductible is a decision that will vary from person to person. We recommend weighing the pros and cons of the following:

  • Financial situation: Consider your financial ability to pay the deductible in the event of a claim.

  • Risk tolerance: Evaluate your risk tolerance and how much financial risk you are willing to bear.

  • Type of deductible: Most of the time, deductibles apply per claim. Acuity's Road and Residence Package Policy offers a unique opportunity for a per event deductible if your home and vehicle are damaged by the same event.

  • Premium costs: Recognize the relationship between deductibles and premiums. High deductibles can mean lower premiums but may require a higher out-of-pocket payment for a claim. On the other hand, low deductibles result in higher premiums but lower upfront costs in the event of a claim.

Review your insurance policy if you are unsure about your current deductible amounts. For personalized advice, consult with a local independent agent.

 *This is general information. Actual payments will depend on the specific event and policy language.