Health Insurance Insurance

How High Should Your Insurance Deductible Be?

Written by Beth Trach

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.

To recap:

  • Lower premium = higher deductible
  • Higher premium = lower deductible

How to Decide on the Right Deductible for You

Though it might seem like it doesn’t matter which one is higher — the insurance company will get you coming or going, amirite? — it’s definitely worth crunching the numbers to see if you can save on your overall insurance costs. One of the easiest ways to do this is to choose a higher deductible policy so you can take advantage of lower premiums.

This is a scenario that forces you to compare actual numbers today with possible numbers tomorrow. To be perfectly clear: The total amount you’ll pay for your insurance definitely includes your premiums and might include your deductible if you need to make a claim. So it makes the most logical sense to lower your premiums — the amount you’ll definitely pay — and take your chances on the deductible — the amount you might pay if something terrible happens.

For example, let’s assume you have a choice between Policy A, which has a $1,000 per year premium and a $500 deductible, and Policy B, which has an $800 premium and a $1,000 deductible. Over five years, you’ll pay a total of $5,000 for Policy A but only $4,000 for Policy B. The $1,000 you save over that time period means that you could completely cover your deductible for two accidents.

You could bank that money and let it earn interest for you in the meantime, or use it to pay off your debts. The idea here is that you’re not as likely to pay the deductible as you are the premium, so it makes mathematical sense to play the odds. (To see this in real life, check out this article about car insurance hacks.)

The Caveat: For a higher deductible to work for you, you must have sufficient cash in savings to cover it just in case you do find yourself making an insurance claim.

The right deductible for you is the one you can cover from your emergency fund. If you don’t have an emergency fund at all, you should start one now, before you tinker with your insurance policy.

If you do have an emergency fund, it doesn’t have to cover your entire deductible just yet. The right deductible for you is the highest one you can cover by adding the amount money you’ll save on one year’s premiums to your emergency fund.

Every few years, you should check the deductible options on your policy and adjust accordingly. As you build your savings, you’ll have more cash on hand to cover even higher deductibles, resulting in even more upfront premium savings — which you can then put right into your emergency fund to make it even bigger. With good luck and no claims, you can watch these savings snowball in a happy cycle.

Have you found a way to save on your insurance? Share your ideas in the comments!

About the author

Beth Trach

Elizabeth Trach is a writer and editor living in Newburyport, MA. She also sings in a band, grows almost all her own food, and occasionally even cooks it. You can catch up on all her adventures in frugal living and extreme gardening at Port Potager.

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