You probably haven’t squandered many brain cells thinking about insurance deductibles. And, to be fair, it’s not the most stirring topic imaginable. But it’s important to have a handle on how your deductible works within the context of your homeowners or renters policy.
Here’s the TL;DR if you’re short on time:
- A deductible is the amount of money that will be subtracted from any future claims payouts; it’s your contribution to the claim. It applies to each covered claim.
- You choose your deductible amount, which typically ranges from $250–$2,500 for renters, and $500+ for homeowners.
- In general, a lower deductible means a higher monthly premium, and vice versa.
- It’s best to choose a deductible amount that’ll make sense for you, based on your financial health.
- Deductibles exist to make you be a bit more careful with your stuff and to keep the cost of policies low for everyone.
Not so daunting, right? If you’d like more information, we’ll dig into the following topics below:
What is an insurance deductible?
An insurance deductible is an amount of money you choose when purchasing a policy that will be subtracted from any future claims payouts.
Let’s say your $750 iPhone was stolen and your deductible was $250. Your insurance company would pay you $500.
Think of a deductible as your participation in the damage or loss. You’re saying, “I commit X dollars to any claim on future losses or damages, and my insurance company will cover the rest.”
It probably sounds a little weird that you have to pay a monthly premium and, on top of that, you won’t get the full value of your stuff in return when things go sideways. But don’t worry, we’ll dig into why that is a bit later. It’ll all make sense, we promise!
Usually, your deductible will be a fixed dollar amount although some companies also offer deductibles as a percentage of an insured value. Keep in mind that deductibles may vary based on where you live, as insurance regulations differ from state to state.
How do insurance deductibles work?
When signing up for a renters or home insurance policy, you’ll be asked to choose a deductible. This’ll typically range from $250 to $2,500 for renters insurance, and $1000 to $2,500 for homeowners. The deductible is how much you’d have to pay out-of-pocket on every covered claim.
What you’re actually choosing here is your amount of financial participation (the amount subtracted from a claim) in the event that something happens to your stuff.
Here are a few examples:
1. You have renters insurance and chose a deductible of $250 when you bought your policy
2. A few months later, you file a claim for a stolen watch valued at $1,000
3. If the claim is approved, your insurer will pay you $750 ($1,000 minus your $250 deductible)
Note: If the total loss is less than the deductible, there’s no point in making a claim; your insurer can’t reimburse you for anything.
1. You chose a deductible of $250 when you bought your policy
2. Your $200 Bose headphones get stolen
3. Since the replacement cost of the headphones is less than your deductible, you won’t get anything from your insurer on this one
So, now you’re probably wondering: Why doesn’t everyone just choose a low deductible to make sure that if anything goes missing, it’ll be covered in full?
How do you choose the right deductible amount?
First off, there’s no such thing as the “right” amount. Different people have different preferences.
First, ask yourself a few questions, such as:
1. Do I have at savings equivalent to 3 months worth of my salary in the bank?
2. What amount could I cover myself before I need help from my insurance company?
3. Is most of my stuff easily replaceable?
4. Do I generally keep my breakable/valuable items safe? Be honest, really!
5. Would I prefer to pay a larger sum of money at one time in the event of damage or loss of an item, rather than a higher rate each month?
If you answered ‘yes’ to most of these questions, you’ll probably want to choose a higher deductible. If you answered ‘no,’ you’ll want to stick with something on the lower end of the spectrum.
Another helpful strategy is to think about something of value in your apartment or home. What would you be able to pay today if you had to replace it?
Why do insurance companies have deductibles?
Some of you are probably saying, “All this deductible stuff is really confusing. Wouldn’t it be easier if insurance companies just ditched the idea completely?”
There are two main reasons for the use of deductibles in insurance policies:
1. To mitigate the behavioral risks associated with moral hazard
In plain English: If you’re responsible for participating in some part of a future claim, you’ll more likely to be a bit more careful when it comes to your things.
2. To solve the classic “tragedy of the commons” problem
Yet another mouthful. Consider this: How many claims would insurers have to handle if they responded to every single claim, no matter how small? Think scratched sunglasses, lost scarves, cracked phone screens, dented laptops, and so on. That’s a lot of claims to manage.
The costs associated with these types of claims is enormous. Insurers would invest the same amount of time on a $5 claim as they would on a $5,000 claim.
So if insurers took on every $5 claim that came their way, they’d be stretched too thin. Sometimes, the money it costs to deal with the claim is more than the claim itself.
Insurance companies would have to hire more people or invest in more technology to handle the workload. This investment would have to be financed somehow, most likely at the expense of your insurance premiums.
To sum it all up, insurance companies use deductibles to reduce loss exposure and to help keep premium costs at a minimum for all policyholders.
Where to find and how to change your deductible
If you happen to forget what amount of a deductible you chose, you can always check out the declarations page on your insurance policy.
If you have a policy with Lemonade, you can simply open the app and pull up your deductible. Want to you’d like to change your deductible at any point? Click “Edit Coverage” on the home screen of the app, scroll down to the deductible section, and go for it. You’ll receive confirmation of your updated policy via email, right away
Deductibles for specific events
Insurance companies offer unique deductibles for specific events like hurricanes or fires. Make sure to double check for these add-ons when purchasing a policy.