Deductible

Detailed Definition

A deductible is a specified amount of money that the insured must pay before an insurance company will pay a claim for a covered loss under the policy. For instance, if a homeowner experiences damage to their property, any claim made to the insurance company would require the homeowner to pay a set amount first. This mechanic helps mitigate the number of minor claims insurers have to process and encourages policyholders to handle small repairs themselves.

Examples

Homeowner’s Insurance:
- Scenario: A home incurs water damage estimated at $5,000.
- Deductible: $1,000
- Insurance Coverage: After the homeowner pays the deductible, the insurance company would cover the remaining $4,000.
Auto Insurance:
- Scenario: A car is damaged in an accident with repair costs amounting to $3,000.
- Deductible: $500
- Insurance Coverage: Once the deductible is paid by the car owner, the insurance company covers the left $2,500 in damages.
Health Insurance:
- Scenario: Medical treatment costs $2,000.
- Deductible: $300
- Insurance Coverage: Post deductible payment, the insurance company pays the remaining $1,700.

Frequently Asked Questions (FAQs)

Q1: How does selecting a high deductible affect my insurance premium?

A1: Opting for a high deductible often results in lower monthly or annual premiums, as the policyholder assumes more risk by agreeing to cover a larger initial portion of any claims.

Q2: Can I change my deductible amount after purchasing an insurance policy?

A2: Generally, you can adjust your deductible amount when you renew your policy, but it may not always be possible mid-term. It’s best to discuss your options with your insurance agent.

Q3: Is it better to choose a higher or lower deductible?

A3: The choice depends on your financial situation and willingness to manage risk. A higher deductible reduces premium costs but increases out-of-pocket expenses in the event of a claim. Conversely, a lower deductible increases premiums but decreases personal risk for minor claims.

Q4: Are there any minimum deductible amounts?

A4: Yes, most insurance companies set minimum deductible amounts. These amounts can vary based on the policy type and coverage level.

Deductible Limit: The maximum amount a policyholder is required to pay out-of-pocket for deductibles within a policy period.
Premium: The amount paid, typically monthly or annually, for an insurance policy.
Copayment: A fixed amount paid by the insured for services covered, typically seen in health insurance.
Policyholder: The individual or entity that owns the insurance policy.
Coverage Limit: The maximum amount an insurance company will pay for a covered loss.

Online Resources

References

Insurance Information Institute (III). (2023). Understanding deductibles. Retrieved from https://www.iii.org/
NerdWallet. (n.d.). What is a deductible?. Retrieved from https://www.nerdwallet.com/

Suggested Books for Further Studies

“Insurance for Dummies” by Jack Hungelmann
- A comprehensive guide providing insights into choosing and managing different types of insurance coverages.
“Health Insurance and Managed Care: What They Are and How They Work” by Peter R. Kongstvedt
- Offers in-depth knowledge about health insurance, deductibles, and copayments.
“The Complete Idiot’s Guide to Buying Insurance and Risk Management” by Georgene Lockwood
- A resourceful guide on understanding various insurance policies and risk management strategies.

Real Estate Basics: Deductible Fundamentals Quiz

### What is a deductible? - [x] The amount of money the insured must pay out-of-pocket before the insurance company covers the claim. - [ ] The total value of the insurance policy. - [ ] The monthly payment made to the insurer. - [ ] The refund received after a premium payment. > **Explanation:** A deductible is the amount of money that the insured pays out-of-pocket toward a loss before their insurance coverage kicks in to pay the rest of the claim. ### Selecting a high-deductible insurance policy will generally result in a ______ premium. - [ ] Higher - [x] Lower - [ ] Unaffected - [ ] Variable > **Explanation:** High-deductible policies typically come with lower premiums because the policyholder is accepting more risk by agreeing to pay a higher initial amount in the event of a claim. ### In a claim where the damage is estimated at $5,000 and the deductible is $1,000, how much will the insurance company pay? - [ ] $1,000 - [ ] $2,500 - [x] $4,000 - [ ] $5,000 > **Explanation:** After the insured pays the $1,000 deductible, the insurance company will cover the remaining $4,000 of the claim. ### A deductible applies: - [x] Each time a claim is made - [ ] Once at policy inception - [ ] Annually regardless of claims - [ ] Every five years > **Explanation:** A deductible is usually applied each time a claim is made, meaning the policyholder has to pay the deductible amount for every separate incident before coverage kicks in. ### Who decides the amount of the deductible? - [ ] The insurance regulatory board - [ ] The policyholder always - [x] It can be mutually decided by the policyholder and insurer - [ ] It is fixed and cannot be changed > **Explanation:** The deductible amount can be chosen by the policyholder at the time of purchasing the policy and agreed upon with the insurer. ### What's the role of the deductible in the amount an insurance company provides? - [x] To reduce the number and size of small claims - [ ] Increase as a payment bonus - [ ] Function as a premium - [ ] Deduct more coverage from other areas > **Explanation:** Deductibles serve to minimize the number and size of small claims, encouraging policyholders to take care of minor issues themselves and letting insurance cover more significant losses. ### What happens if your repair cost is less than your deductible? - [x] The policyholder pays the full amount of the repair. - [ ] The insurance company covers it all. - [ ] The repair cost is reimbursed. - [ ] Annual premiums reduce automatically. > **Explanation:** If the repair cost is less than the deductible amount, it is entirely the responsibility of the policyholder to cover and nothing is claimed from the insurance company. ### Which of the following would likely offer a lower premium insurance plan? - [x] High deductible health insurance - [ ] Low deductible home insurance - [ ] No deductible auto insurance - [ ] Comprehensive travel insurance with no deductible > **Explanation:** High deductible insurance plans typically offer lower premiums because the insurer is less likely to pay out for small claims. ### What is another term related to deductibles in insurance terminology? - [ ] Revenue - [ ] Lease - [x] Premium - [ ] Appraisal > **Explanation:** The term "premium" refers to the amount paid by the policyholder for the insurance coverage, which can be impacted by the choice of deductible. ### What might be a disadvantage of a low deductible policy? - [ ] Higher out-of-pocket expenses - [ ] More claims - [ ] Excessive coverage - [x] Higher premium costs > **Explanation:** Choosing a policy with a low deductible means higher premium costs, as the insurance company will be responsible for more smaller claims.