Insurance is one of those things that you probably don’t think about very often. As long as things are going well for you, you don’t have to use your insurance plan much, so you may only be up close and personal with it on a monthly or yearly basis when you pay the bill.
In most cases, insurance is a mandatory purchase. It’s very often required by law, and it’s a good hedge against financial catastrophe in the event your house burns down, you crash your car, or you become seriously ill. Just because you have to pay for it doesn’t mean that you should have to pay a lot, though. One way to control your costs is to make sure your deductible is set at the right amount for your finances and lifestyle. Here’s what you should know.
What Is the Deductible?
Simply put, your insurance deductible is the amount that you agree to pay upfront before your insurance policy will kick in and start paying for your losses. It’s a part of nearly every insurance policy, including auto, home and health insurance policies.
For example, let’s say your auto insurance policy has a $500 deductible. That means that if you get into a fender bender tomorrow, you will have to pay for the first $500 of the repair bill. If the cost of repairs is over $500, your insurance company will pay the rest. If the damages are less than $500, you’ll be covering the full cost yourself.
If you haven’t looked over the details of your insurance policy lately, it’s incredibly important to take a minute to know and understand your deductible. If yours is set at $1,000 on that car insurance policy but you can’t imagine where you’d get a grand to cover repairs if you had an accident, you could be in trouble. The same goes for your home and your health insurance policies, so find a rainy day to look over all the details to protect yourself.
How Your Deductible Is Related to Your Premiums
Your insurance premium is the total amount you pay to the insurance company for your policy. This is usually assessed each year, but you may have the option to break your payments into monthly installments. In general, the higher coverage amounts you have, the more you’ll pay for your insurance overall. That’s why, for example, an auto policy with that covers collision will cost more than one that doesn’t: You pay extra now to get more money later if you need it due to an accident.
Your premium and deductible are inversely related. This means that as one goes up, the other goes down. If you choose a policy with the lowest possible deductible, the annual premium will almost certainly cost more than a policy with a high deductible. This is because the insurance company is going to get their money one way or the other, either now in your premium or later when you have to shoulder the responsibility of a higher deductible.