What Is a Deductible in Insurance? Your Out-of-Pocket Cost Explained
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An insurance deductible is the amount you must pay before your insurance plan kicks in to cover the difference. The deductible you choose will affect your premium, with higher deductibles resulting in lower rates and vice versa.
Learn how deductibles work across the different types of insurance and tips for choosing the right amount for you.
How Do Deductibles Work?
Think of paying deductibles as sharing the cost and risk of accidents and certain perils with your insurance company. If you pay a portion of the cost via your deductible, then your insurance carrier will chip in and cover the remaining balance.
For example, let's say an ember escapes from the fireplace and a fire spreads throughout your living room. Fortunately, you were able to extinguish the flame but only after it caused $5,000 in damages.
The fire damage is covered under your homeowners policy and your out-of-pocket deductible is $1,000. You pay $1,000 to replace your burned furniture and repair your scorched walls, while your home insurer covers the remaining $4,000.
Are Insurance Deductibles Required?
You are responsible for paying your deductible before your insurance company starts paying toward your losses.
Keep in mind that for homeowners insurance, auto insurance and many other insurance policies, the deductible resets on a per-claim basis. If you have a $250 deductible and have to file a homeowners insurance claim both in February and July, then you will have to pay the $250 deductible for both claims.
Health insurance is one exception to the rule, with the deductible being cumulative and it will usually reset annually. That means if you visited the doctor five times in January and February, then all expenses paid out of pocket for each visit will count toward your deductible for the year.
How Are Deductibles Determined?
In many cases, deductibles are a flat amount such as $100, $500 or $1,000. However, there are some cases when a deductible may be percentage-based. You will sometimes see this when buying homeowners insurance.
To demonstrate the difference, let's say your home is insured for up to $100,000. Your recent claim after a fire was approved, and your losses totaled $10,000. If you have a flat $2,000 deductible, then you'd pay $2,000 and your insurance company would cover the remaining $8,000. If you have a 5% deductible, then you'd pay $5,000 ($100,000*0.05) and your insurance company would cover the remaining $5,000.
What Types of Insurance Deductibles Are There?
Deductibles are commonly paid across most types of insurance, including auto, homeowners, renters and health. Deductibles can function a little differently depending on your policy, as well.
Car Insurance Deductible
You will have to pay a car insurance deductible if you file a physical damage claim for your car, which falls under the collision or comprehensive portion of your auto policy. Most drivers choose a $500 deductible on average but deductibles can range from $250 to $2,500. A deductible may also apply if you file a personal injury protection (PIP) claim or if you are seeking reimbursement from your carrier because the other driver was at fault but was uninsured.
There is no deductible if you file a liability claim, which is a claim to reimburse the other driver for their losses in a car accident where you are at fault.
Homeowners Insurance Deductible
Homeowners insurance deductibles commonly range from $100 to $5,000, with $1,000 being the average. However, you may have separate deductibles for specific perils depending on where you live.
For example, in coastal states like Texas and Florida where hurricanes pose a high risk, homeowners may be subject to a separate hurricane deductible. If a hurricane damages a homeowner’s property, they will be responsible for paying the hurricane deductible instead of the general deductible before their insurance coverage kicks in.
Renters Insurance Deductible
Renters insurance deductibles can start at as low as $250 can climb to as high as $2,500. Keep in mind that renters insurance doesn’t cover the structure of where you live but rather your personal belongings so claims will mostly revolve around your items being stolen or damaged.
Health Insurance Deductible
In 2022, the average single deductible was $1,992, while the family deductible averaged at $3,811. A single deductible requires an individual to pay a set amount out of pocket annually before their insurance contributes. Conversely, a family deductible considers the medical expenses of all family members under one plan. For example, with a $3,000 family deductible, insurance coverage starts after the total family medical expenses reach this amount, regardless of whether one member or multiple members incurred the costs.
Unlike other types of insurance where you’d pay a deductible for each claim, for health insurance, you will have only one deductible for the policy term. That means all of your out-of-pocket costs will pay toward your health insurance deductible for the year and once you hit it, your insurance company will cover a portion of your medical expenses for the remainder of your policy term. However, you are still responsible for paying your copay or coinsurance for most health care services.
Life Insurance Deductible
Unlike the other types of insurance plans, a deductible does not apply to life insurance. When a file is claimed on a life insurance policy, that means the insured has died. For a beneficiary to claim the benefits, they would need to supply the insurance carrier with a death certificate to show proof of death.
Other Insurance Deductibles
Like the insurance policies listed above, you will likely have to pay a deductible if you buy any other type of insurance coverage including:
- Condo insurance
- Landlord insurance
- Pet insurance
- Boat insurance
- Commercial property insurance
- RV and motorhome insurance
- Travel insurance
- Tiny home insurance
Do Deductibles Impact the Cost of Your Insurance?
Generally, choosing a higher deductible will lower your premium. Conversely, a lower deductible raises your premium.
How Do I Choose the Right Deductible?
Choosing the right deductible depends on the policyholder's budget and likelihood of filing a claim. Let’s use auto insurance as an example. In general, safe drivers benefit from a higher deductible because they save money on their monthly premiums and are less likely to get into an accident and have to pay the higher deductible.
Similarly, somebody who is old, sickly and has to visit the doctor regularly might want to choose a low-deductible health insurance plan. That way, they fulfill their deductible more quickly so that their health insurance company can start contributing to their health insurance costs. A young and healthy person, on the other hand, might want a high-deductible plan so that they can enjoy a lower premium. They are less likely to visit their doctor and as a result, the need for their insurance coverage to kick in might not be as large a concern.