There are lots of choices when it comes to insurance. One of the biggest is how to choose a deductible.
A deductible is the amount you choose to pay before insurance kicks in. It can be as little as $100 and as high $10,000 (with many options in between).
When it comes to your car, deductibles typically only apply to collision and comprehensive coverage (both of which are optional). For your house, it typically only applies to property damage. Liability coverage (which covers you in the event you’re legally responsible for harming someone or their property) typically does not have a deductible. That’s because insurance companies want you to report your liability claim ASAP, even if it’s small.
Generally, there is a direct relationship between the deductible you choose and how much your premium costs. That means if you choose a lower deductible, you can expect to pay more in premium.
Many agents suggest choosing a deductible somewhere in the middle based on what you can afford—and to use insurance to cover true financial loss instead of small claims. More often than not, submitting more claims leads to premium hikes.
In the end, much of it comes down to your tolerance for risk and your financial situation. If being on the line for a larger amount makes you nervous or you’re not sure if you could cover your deductible, consider a lower deductible.
Whether it’s $100 or $10,000, you should have an emergency fund with enough money in it to cover the deductible.
A few final tips on how to choose a deductible
Here are three more things to keep in mind:
- Be aware of percentage deductibles. Typically used in homeowners insurance, percentage deductibles are a certain percentage of your homeowner’s dwelling limit. This can lead to sticker shock since percentage deductibles tend to cost more and be more unpredictable than named deductibles. They can also be different from your overall deductible based on the type of loss like damage from wind and hail, and hurricanes.
- Consider different deductibles for different types of perils. Some insurance companies give you the option of choosing a different deductible for different perils like hurricanes, theft and fire.
- Check with lenders to see if you need a minimum deductible. If you have a mortgage, it’s possible your lender may stipulate that your deductible not exceed a certain amount.
