What is a deductible?
A common term that you have probably heard before if you’ve bought any kind of insurance is a deductible. It doesn’t matter if its for auto, home, or some type of business coverage, you were probably asked at some point what deductible you would like on your policy. You may have asked at the time what it was and the explanation may have been that the higher deductible you have the lower the price of the policy. You may also have decided to take an increased deductible in order to get a lower premium payment on the policy itself. Do you know what that deductible represents if you were to have a claim?
Instead of talking in terms of how the deductible impacts your premium, lets talk about how that deductible would impact you if you were to have a claim. Let’s say you were to have a deer claim, you go to turn in the claim by contacting your agent, and they tell you it would be a good idea to get an estimate on the vehicle repairs before you turned in that claim. You go to your local body shop to get an estimate and lets say that estimate is for $1,500 to fix your vehicle. Now you get that estimate to your agent, your agent says, “Ok, I see you have a $1,000 deductible.” So, what does that mean to you?
If you were to turn in the claim, the cost to repair your vehicle from the claim would be $1,500. If your deductible is $1,000, then the insurance is going to pay for the damage above the $1,000 deductible. The insurance will pay $500 and you would be out the $1,000.
Maybe when you took out the policy and decided on $1,000 deductible, it saved your $20 a month vs. the $500 deductible. But if you have a claim, you would be out the $1,000 to fix or replace your vehicle if you have a claim. You need to ask yourself the question, “Is it easier for me to come up with $500 all at once or pay an extra $20 a month not to have to worry about coming up with that money if I have a claim.”
This works the same way on any policy that has a deductible on it. Instead of thinking how much it will save by having an increased deductible, you should think how much am I comfortable with being out of pocket if I were to have a claim.
Something else to consider, depending on the extent of the damage, you may be someone who knows if you turn in a claim, your insurance will increase. A good exercise to do is determine how much you would be comfortable with being out of pocket if you had a claim before you turned one in. That may be $500, $1,000 or maybe even $2,500.
In the example above with the deer claim, if it cost $1,500 to fix the vehicle and you had a $1,000 deductible, depending on how much you were paying on your current policy, you may choose to pay the whole $1,500 instead of turning it in so it doesn’t cost you in extra insurance premium. Most claims stay on your record up to 5 years. That’s a long time for you to keep getting premium increases as a result of that claim that $500 the insurance company paid. Over those 5 years, the increase in premium may end up being way more than the $500 the company paid out.
Here’s a little insider tidbit about having a claim. Once you turn in a claim, it’s very difficult to switch to another company with that on your record because the carrier you’re with more than likely isn’t charging you as much premium as if you moved to another company seeing that you have a claim on your record.
Next time you’re looking at your insurance policies, it’s a good idea to think through your deductible a little bit more and make sure you know what you would be comfortable paying before you turn in a claim.