Understanding What a Deductible Is

When it comes to insurance, many folks aren’t sure what a deductible is and why it’s so important. Put simply, a deductible is an amount of money, usually as a defined fixed value, which must be paid by the policyholder first, before any insurance payments can be made. It’s much like putting down a deposit for a loan: the insurance company will pay for the remainder after the deductible is met.

Let’s make this even more simple by taking a look at a few examples. Say you own a home and you have homeowner’s insurance. It’s possible that, if you ever make a claim, your insurer will require you to pay a certain amount of money in deductibles. It is at this point that the insurer can cover the remaining costs. Deductibles are essential because they prevent people from making claims over minor occurrences.

Why Are Deductibles So Important?

Deductibles are important because they allow us to share the cost of expected losses with the insurer. Therefore, if an insured event happened, the insurer will only pay for the cost greater than the amount of the deductible. The higher the deductible amount, the lower the premium as well. The deductible can help to lower the total cost of coverage for a policyholder, as well as reduce the insurer’s risk.

Further Benefits of Deductibles

In addition to helping to bring down the cost of insurance, deductibles can also help to minimize frivolous and fraudulent claims by raising the financial stakes for policyholders that make a claim. A policyholder who has met his deductible will be more likely to begin the claims process in good faith, as he has already made a financial sacrifice. On the other hand, the policyholder that is responsible for the full amount of his deductible is extremely unlikely to make a fraudulent claim.

Overall, deductibles are useful and essential components of any insurance policy. By making policyholders responsible for a portion of their losses, deductibles help to keep premiums down, reduce fraudulent claims and prevent policyholders from making frivolous claims. Therefore, it’s important to understand what deductible amount you’re comfortable with when deciding on a policy that meets your needs.