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Whether you're in the market for home insurance, car insurance or health insurance, premiums aren't the only expense to consider. When purchasing insurance, you'll typically need to choose a deductible—the amount you'll pay out of pocket before your policy pays out. The size of the deductible you select can affect the cost of your insurance. Here's how to decide whether a low deductible or high deductible is right for you.
How Does a Deductible Work?
A deductible is the amount of money you'll have to pay out of pocket before your insurance coverage pays out. Auto insurance deductibles are usually a dollar amount (such as $500), and homeowners insurance deductibles may be expressed as a dollar amount or a percentage of your total coverage. In some cases, you can select a dollar amount or a percentage amount. Home insurance may also have different deductibles for various perils, such as hurricanes, wind or hail.
Home, car and renters insurance usually have a per-claim deductible. Most health insurance policies have annual deductibles, which work a little differently. The annual deductible is the amount you must pay for health care services (not counting insurance premiums) in a certain year before your insurance begins to cover the cost. (Certain medical services, such as preventive care, may be covered without the need to meet a deductible.)
For example, suppose you have an annual health insurance deductible of $1,500. You pay out of pocket for health care until you reach your deductible. At that point, your health insurance takes over and pays your costs through the end of the coverage year. When your coverage renews, your deductible resets.
You can usually adjust your homeowners, renters or auto insurance deductible higher or lower should you choose. There are generally minimum deductible limits.
When you purchase health insurance or choose a plan through your employer, you can't adjust the plan's deductible. However, you might have the option to choose between different health insurance plans, one with a low deductible and one with a high deductible. IRS rules define which plans are considered high-deductible health plans (HDHPs). For 2023, HDHPs are those with a minimum deductible of $1,500 for self-only policies or $3,000 for a family policy, and a maximum out-of-pocket amount of $7,500 for self-only and $15,000 for a family.
High Deductible: Pros and Cons
When you're considering an insurance policy with a high deductible, be aware of the pros and cons.
Pros
- A high deductible generally means lower insurance premiums. Depending on your budget, this could make the difference between purchasing essential insurance or going without.
- If you don't plan to file claims for minor losses, a higher deductible might make sense. For instance, if you'd file a claim when your car is totaled but not when the fender gets dented, a higher deductible could work for you.
Cons
- You'll have to pay more out of pocket when you file a claim than if you had a lower deductible.
- Repairs to your vehicle might be delayed if you can't afford to pay your deductible right away.
- In the case of health insurance, you might be tempted to skip or postpone necessary medical care because your deductible is so high.
- If your car is financed, the lender may prohibit you from choosing a higher deductible.
Low Deductible: Pros and Cons
A lower deductible has both positive and negative sides.
Pros
- You'll pay less when you file an insurance claim than you would with a higher deductible.
- If your driving record includes lots of tickets and accidents, you may be likely to have another accident. In this case, a lower deductible could be a smart move.
- A deductible low enough for you to easily pay means no delay in getting your vehicle repaired.
Cons
- You'll generally pay higher premiums for a lower deductible, because your insurer shoulders more of the cost if you file a claim.
- Knowing you won't pay much out of pocket, you might be tempted to file insurance claims for relatively minor damages. Filing claims can cause insurers to raise your premiums, potentially wiping out any savings from the lower deductible.
How to Choose the Right Deductible and Insurance Policy for You
Choosing the right insurance deductible is a gamble. The savings from higher deductibles are a sure thing, assuming you never have an insurance claim. If you do file a claim, however, a high deductible could drain your bank account. When making your decision, consider:
- How often do you expect to file a claim? When you live in an area prone to flooding, for instance, you might want a lower deductible on your flood insurance. On the other hand, if low-deductible flood insurance is out of your price range, a higher deductible could make coverage affordable, protecting your home. You could use a personal loan or a low-interest credit card to pay the deductible if you have a claim.
- Do you have the financial resources to pay a high deductible? A solid emergency fund can help you cover your costs before you reach a high deductible. You could also use a credit card to cover out-of-pocket costs. However, if you can't pay the credit card bill in full, the remaining balance will accrue interest, which could negate any savings from a higher deductible. If you're living paycheck to paycheck with minimal savings, have no credit cards yet or have a credit limit too low to handle a high deductible, you might want a lower deductible you can easily pay.
The best way to choose between low and high deductible insurance is to compare insurance policies. Make a budget to get an idea of how much coverage you can afford. Get quotes from a variety of insurance providers for the same type and amount of coverage. Then adjust the deductibles to see how that affects your premiums. You can do this on the insurance company's website, at a car insurance comparison site or other insurance marketplace, or by talking to an insurance agent or broker.
The Bottom Line
Raising your deductible isn't the only way to lower the cost of insurance. Car insurance companies typically offer a wide range of insurance discounts, such as for bundling home and auto insurance, maintaining a good driving record or paying your annual premium upfront. You may be able to get home insurance discounts by updating your home's systems or installing burglar alarms and safety features.
In many states, insurance companies can check your credit-based insurance score, which is based on similar data to your regular credit score. Paying your bills on time and paying down debt can help you maintain good credit, which could lower your insurance costs.