Buying insurance can be stressful. Each type of insurance comes in a huge range of prices and coverages. There are a few things each type of insurance has in common however. Every insurance has two things in common:
- A Deductible
- A Premium
If you know what both of these are, it will make selecting your insurance much less confusing.
The insurance deductible is the amount of money you must pay before your insurance starts to cover the cost of a claim. The value of the deductible varies depending on the premium you are paying. If you are paying a lower premium, companies generally give you a higher deductible since you aren’t contributing as much to the pool of money that will be drawn from to cover insurance claims. It’s important to note that only certain costs count towards your deductible. This will be outlined in your insurance plan.
It’s possible to get insurance plans without deductibles. There are two ways to get plans without deductibles:
- As part of a loyalty program for longtime customers
- As part of a plan that has higher premiums or some sort of deductible waiver fee
It’s important to note that some policies have deductibles that accrue during the whole year, while other policies have deductibles that must be met for each instance of the insurance being used. Once your deductible is met you may be required to pay a coinsurance payment, or copay. You’ll need to keep paying this, usually much smaller, amount until you reach your out of pocket maximum. At that point, the insurance company assumes the full cost of claims.
The insurance premium is the amount of money you pay to your insurance company each billing cycle, normally each month. Generally, the lower your premium, the higher your deductible and the less your insurance covers. Insurance companies use premiums to raise money both to support the business and to invest in assets that can be liquidated, i.e. sold, in the event that they need to cover the cost of a claim.
Is it better to have a high deductible or a low deductible?
That depends. You need to think about your risk factors when selecting a deductible. If you think the chances of using your insurance are very low, it might be worth going with a low premium and a high deductible. For example, if the lowest deductible offered by an insurance company is $500, and you aren’t expecting to spend even that much, then it doesn’t make sense to pay a higher premium. In contrast, if you are anticipating exceeding the $500 deductible by a considerable amount, it may be worth spending more money on a higher premium.
Once you meet your deductible, your insurance will cover qualifying expenses. All you have to do is continue to pay your premium. If you experience a major issue that is covered, you’ll be off the hook for most of it. It’s important to understand exactly how much your deductible is, and if you have more than one. Certain types of insurance have different deductibles for different parts of the insurance policy. For example, the earthquake damage portion of homeowner’s insurance may have a higher deductible than the fire damage portion.
How are insurance deductibles and premiums set?
Insurance companies use complicated math done by people in the underwriting department. They determine the likelihood of particular events occurring and how much money they will cost to recover from. Then, they use that information to determine how much they need to charge consumers to ensure that the insurance company has enough money to cover claims and doesn’t go bankrupt. Insurance rates can also change when a policyholder makes a claim. It isn’t unusual for insurance companies to raise rates on a renewing customer after if they made a claim during their previous policy.
Do I need insurance?
That depends. Some types or insurance are required. For example, all drivers are required to be covered by auto insurance. In contrast, not only is flood insurance for homes not required, it can be difficult to get. You’ll need to decide for yourself whether or not you should get insurance. One thing to think about is: Do you have enough money to replace something if you lost it? If not, it might be worth getting it insured.
Some types of insurance also cover liability. This means they will pay out in cases of things like lawsuits or medical bills. Even if you don’t need insurance to pay for something like loss of personal property, it might be worth purchasing insurance to protect yourself from being sued by someone who slipped on a rug in your house.
Can I get custom insurance?
You can get insurance for anything that someone is willing to ensure. Frequently, insurance companies offer a number of standard policies. But if you have something particular that you want insured, one-of-a-kind art for example, insurance companies usually have systems in place whereby they can insure those extra items.
Now that you know what an insurance deductible is, and a little more about insurance in general, you can make a more informed choice when you next shop for insurance. Generally, insurance deductibles and premiums work the same across all types of insurance. And if you need more complicated insurance, there are companies that specialize in helping people with those needs.