What Is a Deductible?

An insurance deductible is the amount you must pay before your insurance plan kicks in to cover the difference. A $500 car insurance deductible, for example, means you'd pay $500 out-of-pocket before your insurance picks up the remaining balance. Deductibles will often vary based on the type of insurance policy.

Deductibles have been standard fare in the insurance world for years. Understanding how it works is essential because your deductible affects your premiums, insurance coverage, and so much more.

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  What Does Deductible Mean in Insurance?

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  How Do Deductibles Work?

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  Types of Deductibles

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  FAQs

What Does Deductible Mean in Insurance?

A deductible is the amount of money that you're required to pay before your insurance company pays the difference on an approved insurance claim. Deductibles are typically required across most types of policies (e.g., homeowners, auto, renters, business, even health). 

Deductible 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. Your home insurer covers the remaining $4,000.

How Do Deductibles Work?

Think of paying deductibles as sharing the cost and risk of accidents and certain perils. If you pay a portion of the costs (your deductible), then your insurance carrier will have your back by covering the remaining balance. 

Your deductible can affect the cost of your insurance premiums. Generally, the higher your deductible, the lower your premiums. Conversely, a lower deductible typically raises your premium. The drawback is that you would pay more out-of-pocket if an incident occurs and file an insurance claim. 

For example, a policyholder who chooses a $1,000 deductible would likely pay less in premiums than a policyholder who chooses a $500 deductible (assuming both policyholders purchased the same coverages and have the same risk profile).

For auto insurance, paying a higher deductible is typically better for safe drivers, who can then save money. High-risk drivers, who are more accident-prone, are more likely to feel the financial blow of a high deductible than a low-risk driver who has few to no accidents.

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Types of Deductibles

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 

Auto insurers offer different types of coverage and each may carry separate deductibles — the deductible for your comprehensive coverage, for example, can be different from your collision coverage. Car insurance deductibles typically range between $250 and $1,000. 

Here's an example of how a car insurance deductible works:

• Scenario: Your car is parked on a public street, outside your home. The next morning, you walk out and discover the windshield is broken. The cost of damages and losses total $2,000. This is an approved claim under the comprehensive coverage in your auto insurance policy.
• Deductible: $500
• Outcome: You'd pay the $500 deductible, and your auto insurer would cover the remaining $1,500.

Homeowners Insurance

The deductible on a homeowners insurance policy may be a flat dollar amount or a percentage based on the total amount of insurance on a policy. Many homeowners opt for a flat homeowners insurance deductible of $500, $1,000 or $2,000. 

Example: To demonstrate the differences between flat and percentage deductibles, let's say your home is insured for up to $100,000. Your recent claim after a fire (a covered claim) 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.

Renters Insurance

Many renters need insurance to cover personal belongings when they are damaged or stolen. Renters insurance deductibles commonly start at $500 but can also be as high as $1,000..

Here's an example of how a renters insurance deductible works:

• Scenario: You come home and discover somebody broke into your apartment and stole $1,500 worth of personal property. Theft is covered under your renters insurance policy.
• Deductible: $500
• Outcome: You pay the first $500 and your renters insurance covers the remaining $1,000.

Health Insurance Deductible

Like other types of insurance, you would pay a deductible with your health insurance plan, plus an additional fee in the form of a copay or coinsurance. When receiving medical services, the additional fee would be on top of your health insurance deductibles. 

Here's how each works:

Life Insurance 

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 policyholder 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.