How Do Insurance Deductibles Work?

Deductibles are an integral part of any insurance agreement. When it comes to personal and auto insurance, you’ll be required to set a deductible amount. This amount is commonly a dollar amount or, especially with property and home insurance, a percentage of the total insured value. You may find the total established amount contained on the declarations page or the front page of your standard personal policies.

Simply put, insurance deductibles are a way of sharing the risk between yourself (the insured) and your insurance company (the insurer.) The more risk you take on, i.e., the higher your deductible amount, the lower your insurance premium will be.

There’s a lot more to it than just that. Read on for more information and frequently asked questions about insurance deductibles and how they work when you make a claim.

How does an insurance deductible work when you make a claim?

Here’s an example. Say your car was severely damaged when a tree crashed down on top of it while it was parked in your driveway. You file a claim, and your insurer estimates the total damages to be around $8,000. You have a deductible amount of $500 for this portion of your auto insurance coverage. The claims check you would receive after you had submitted the $500 to your repair contractor would be $7,500.

Deductibles aren’t always straight amounts. In fact, with most home policies, deductibles will be in percentages of the total insured value. Take, as an example, a home that has a total insured value of $300,000, with an insurance policy that states a 2% insurance deductible. In the event of a claim, $6,000 would be deducted from the total claim payout. Should you suffer a loss that is valued at around $20,000, you would receive $14,000 for that claim check.

Your deductible will apply in almost every instance where you have to make a claim for your auto or home insurance policy. Some exceptions are if the loss is caused by a natural disaster or “Act of God“, like fire or lightning, or if your vehicle is stolen. Moreover, some aspects of coverage – such as collision or comprehensive – are subject to separate deductibles, so you won’t have the same amount for every part of your policy or every loss.

Note also that deductibles will not apply to the liability portions of your auto or home insurance policy. For example, you would have a deductible applied if there was property damage to your home because you incidentally backed your car into a wall, but not if your nearby neighbour also sued you for running through their detached shed and fence at the same time.

What is the benefit of raising my deductible?

Deciding your auto deductible is difficult. Your deductible directly impacts your premiums, so if you are looking for ways to lower your auto insurance premiums or home insurance premiums without slashing coverage or shopping around for additional options, you could choose to increase your deductible amount. In insurance terms, this translates to agreeing to pay out more in the event of a claim in exchange for reduced insurance premiums.

Commonly, auto insurance policies will contain deductible amounts of $200 or $500. You can opt to increase this to $1,000 or even more to significantly reduce your auto insurance premiums. However, if you are involved in an accident and must go through the auto insurance claims process, note that you must pay out this amount before your provider needs to kick in to cover the remainder. Be sure that the amount you choose is realistic and something that you are comfortable with.

Why are some deductibles separate?

Some losses, regardless of whether they are covered by standard home insurance or require a separate purchase, may be subject to their own deductible rules. If you live in an area that sees a high rate of a certain disaster, such as wildfires, earthquakes, or flooding, you may have to pay a specific separate deductible amount. As an example, flood insurance deductibles can range widely depending on your area, province, and can present as dollar amounts or percentages. Moreover, you may have to choose two separate deductibles with flood insurance: one for your home’s contents and one for the physical property’s structure. Other endorsements, like sewer backup, earthquake, etc., also have their own unique rules, which vary by provider. Discuss with your broker for more information.

When won’t I have to pay my deductible?

There are a few situations with insurance claims where you won’t have to pay your deductible. One is liability claims – your deductible will only apply to physical losses, not claims of property damage or bodily injury. Moreover, the size of the claim (with home insurance) may determine if you need to pay your claim (apart from earthquake damage and other special circumstances.) The threshold amount varies by insurance company, as well as your existing level of coverage.

This doesn’t mean it’s a good idea to make claims for every small damage you experience, whether to your home or your vehicle. Your insurance premiums will still be impacted, deductible or not, so it’s best to address smaller damages that you may be able to repair yourself without the intervention of your insurance company.

Although deductibles tend to be relatively straightforward, there are obviously some exceptions. If you are unsure as to why a certain coverage option or endorsement has separate deductible rules or are unsure as to whether you want to raise your deductible or not, Excalibur Insurance has your back. Let our brokers help answer any questions that you may have.