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What is a Deductible?

Tuesday, 29 September 2020

When you are shopping for insurance, it can be tough to find the perfect balance of the best coverage and the lowest price because there are so many factors that influence the cost. Thankfully, our BIG brokers are here to help you find the best of both worlds! When you are looking for quotes, there are a lot of terms that your broker will explain throughout the process. One of the terms that is commonly misunderstood is the deductible. If you carry Comprehensive coverage, Collision coverage, or both, you will have a deductible and it affects how your claims are handled. Maybe you bought coverage a while ago and you’re still unsure and are asking just what is a deductible anyway? In this blog, we will answer the question, “What is a deductible?”

What is an Insurance Deductible?

So, what is deductible in the insurance world? An insurance deductible refers to the amount of money you agree to pay in the event of a claim on your insurance policy.

Deductibles are a part of what keeps insurance prices low; it protects the insurance company from paying out countless small claims, each of them costing money. The higher the rate of claims for a company, the more they must charge their clients in order to be able to fill those claims. It really is to your advantage that insurance companies use the deductible to keep their prices low. The deductible also adds incentive to do your best to take care of your vehicle.

If you have a claim that is lower than your deductible amount (ie. repairs are $500 and your deductible is $1000), your insurance company will not cover the damage since you had already agreed to pay $1000 towards the claim. Instead, you are responsible to pay for the repairs. At least, in this case, it costs you less than paying your deductible.

As the insured, you have a lot of control over how big or small you want your deductible to be. It’s generally a personal preference for you to gauge how much money you want to pay towards a claim. Your deductible amount does have an impact on your premium, which we will discuss further below.

How does a deductible work: Collision?

What is a deductible for Collision coverage? When you have physical damage coverage on your car insurance (known as Collision and Comprehensive), you select a deductible amount for each of these when you agree to your policy.

If you are in an accident, and you are determined to be at fault or partially at fault in the accident, your claim will go through Collision coverage and you will have to pay the Collision deductible amount towards the repair of the vehicle. Your insurance will pay the remainder of the cost of the damage.

Here’s an example: if the total cost to repair your vehicle in a Collision claim costs $10,000 and you have a $1000 deductible on your policy, you will pay the $1,000 and your insurer will pay the remaining $9,000 towards the repairs.

If you are not at fault for the accident, the damage to your vehicle will be paid by the Direct Compensation coverage of your policy. In this case, you are not using your Collision coverage and hence you do not need to pay your deductible.

A hit-and-run accident is a trickier situation. If someone hits your vehicle and flees the scene, you will have to pay your Collision deductible for repairs. However, if you are able to identity the individual who hit your car, your claim can be made under the Direct Compensation portion of your policy at which point you do not have to pay the deductible as long as the other person has the appropriate coverage.

How does a deductible work: Comprehensive?

What is a deductible for Comprehensive coverage? When your vehicle is stolen, vandalized, or you have other damage not caused by another driver (ie. windshield chip/crack, hail, hit a deer with your car, etc.), your claim would be filed under your Comprehensive coverage. A Comprehensive claim still requires that you pay your deductible.

How does an insurance deductible affect my premium?

When you choose a lower deductible (say $500), your insurance premium will be higher than having a higher deductible of $1000 or $2000. A lower deductible will cost less when you make a claim, but may cost you more in the long term. Conversely, a higher deductible will lower your insurance rate, but while you might enjoy the lower and affordable premium, make sure you could afford the higher deductible when you make a claim. 

A lot of it boils down to your budget and your comfort level. When you are choosing your deductibles, make sure you know that you could afford to pay it if you have a claim, and that you can afford your insurance premium, too.

What is a Deductible? Special Circumstances

There are a few scenarios where you may have less control over your deductible amount.

If you have a history of a lot of claims, your insurer may require you to have a higher deductible because historically your record shows you cost an insurance company more money than average. If you are a person who makes a lot of claims, or tends to be in more accidents, an insurance company will consider you a higher risk. When your deductible costs you more for repairs, the idea is that the insurance company is incentivizing you to avoid accidents and claims because of what it will cost you. All the more reason to practice safe driving habits and take good care of your car to avoid accidents and claims!

Another reason you may require a high deductible would be due to a very valuable car. Luxury or sports cars, for example, are higher in value and therefore cost a lot more to repair or replace, so the insurer requires the commitment that you will pay a higher amount towards the repair simply because of its value.

 

If it is still unclear and you’re still wondering “What is a deductible?” or you are still unsure about how a deductible works – not to worry! An insurance professional will be able to explain and give you more clarification specific to your policy. When buying a new (or used) car, be sure to consider your insurance in your buying decision and look at the different deductible options available. Take the time to carefully consider a deductible you can comfortably afford. Our BIG brokers can help make this process super simple, so contact us today for a free, no-obligation quote.