What is an insurance deductible?

How do deductibles work?

When shopping for insurance, you'll find that deductible amounts vary from policy to policy. There's a correlation between the deductible amount and your insurance rate. If you have a higher deductible, your premiums will typically be lower. Conversely, you can expect your premiums to be higher with a lower deductible.

Important note: When and how a deductible applies can vary based on the type of policy. Learn more in the section below on the different types of deductibles.

Keep in mind that insurance deductibles are based on financial risk. If you opt for a higher deductible, you may be paying a lower rate, but you're also assuming greater financial responsibility for the expenses you'll be required to pay for a claim.

What is an insurance premium vs. a deductible?

An insurance premium is the amount you pay an insurance company for coverage. You might pay monthly, semi-annually, or annually.

On the other hand, an insurance deductible is the amount of money that you're responsible for paying out of pocket for a covered claim.

What is an example of a deductible?

If you have a $250 deductible on your car insurance policy's collision coverage and you get into an accident causing $5,000 worth of damage to your vehicle, you will need to pay $250, and the insurance company would cover the remaining $4,750.

Types of insurance deductibles

Auto insurance deductibles

Auto insurance deductibles apply to each insured loss, meaning you'll pay the deductible stated in your policy every time you file an applicable claim. Usually, you'll only pay a deductible on your comprehensive and collision coverage, but some comprehensive claims may not require a deductible, such as windshield claims in some states. If the damage doesn't meet the deductible threshold, you'll pay for the costs out of pocket. You may also have a deductible on your uninsured motorist property damage and personal injury protection coverage. A deductible doesn't typically apply to claims filed under your liability coverage.

Property insurance deductibles

Homeowners deductibles and renters deductibles are similar to auto deductibles — you'll pay a deductible for each insured loss (generally for claims filed under dwelling, other structures, and personal property coverage). Since damage to a home tends to be pricier, paying a lower deductible can reduce your out-of-pocket cost and soften the financial blow of repairs.

Health insurance deductibles

Unlike auto and property deductibles, your health insurance deductible is the amount you must spend out of pocket before your insurance pays for most types of care. Once you have paid your deductible, your insurance starts paying for a portion of your covered medical expenses (known as coinsurance). Some health plans may even have separate deductibles for certain categories, such as in-network or out-of-network care. Health insurance deductibles apply on an annual basis, which means your deductible will reset when your policy renews.

For example, if you have a $2,000 deductible and spend that much on healthcare during the year, your insurance will start paying for a portion of any subsequent covered medical bills until the end of the year. The next year, your deductible will apply again, and you'll need to spend $2,000 on medical expenses before your insurance starts covering these expenses. Note that most policies also have a maximum out-of-pocket limit, beyond which your insurer generally covers 100% of your eligible medical bills. In addition, certain expenses might be covered by a health insurance plan regardless of whether or not you have met the deductible.

When to choose a higher or lower deductible

When buying most types of insurance, you have the option of choosing a lower or higher deductible. Each has its positives and negatives, so consider these factors before making a final decision:

When choosing between a low or high insurance deductible, think about how comfortable you are with taking financial risks. If you want to avoid big out-of-pocket expenses after filing a claim, a lower deductible may be your best bet.

What happens if I don't meet my deductible?

If the damage to your car or home isn't high enough to meet your deductible, you would pay for the damage. For example, your car insurance deductible is $1,000 and the damage to your vehicle costs $500 to repair, your insurance company will not pay anything because the damage is less than the deductible. So, you're responsible for the full $500.