Understanding Your Deductible

A deductible is a standard part of any insurance policy.

So, what is it? The deductible is an amount of money that you have agreed to pay in the event of a claim before your insurance coverage begins. When you purchase an insurance policy, you determine how much you are willing to pay out of your own pocket in the event of a loss. That's your deductible. The higher your deductible, the greater the level of risk you are willing to accept.

How does it work?

Let's say that when you purchased your policy, you selected a $500 deductible. Now, you are involved in an accident, and it's going to cost $2,500 to repair your car. You are responsible for the first $500 in damage repairs, and the insurance company will pay the remaining $2,000. In other words, when you receive your payment check, $500 will have been deducted from it. That's exactly why they call it a deductible!

One important note: If you are in an accident and you are not at fault, you will still pay the deductible for the damages sustained to your vehicle. But, if the party at fault is insured, his or her insurance company may reimburse you the amount you paid for your deductible.

Your deductible affects your rates.

The higher your deductible, the lower your premium. And, the lower your deductible, the higher your premium. Why is that? Having a high deductible means you are taking on a greater portion of the risk. Having a low deductible means you are taking on a smaller portion of the risk.

If you want to save money on insurance, raise the deductible, but remember that if you do have an accident, you'll have to pay more out of your own pocket. Whether you choose a high deductible or a low one, set aside an emergency fund to cover that amount so you're prepared when the unexpected happens.