Understanding the Basics of Insurance Deductibles

Insurance deductibles are an essential aspect of most insurance policies, whether it be for auto, homeowners, or health insurance. Understanding how deductibles work is crucial in making informed decisions about insurance coverage. In this post, we will discuss the basics of insurance deductibles, their purpose, types, and factors to consider when choosing a deductible amount.

What is an insurance deductible?

An insurance deductible is the amount of money a policyholder must pay out-of-pocket before their insurance coverage kicks in and pays for covered losses or expenses. It serves as a way to share the financial risk between the insured individual and the insurance company. For example, if you have a $500 deductible and incur $1,000 in covered losses, you will pay $500, and the insurance company will cover the remaining balance, up to the policy limits.

Purpose of insurance deductibles:

The primary purpose of insurance deductibles is to prevent the overuse of insurance coverage for small or manageable losses. It encourages policyholders to only file claims for significant losses or emergencies, helping to keep insurance premiums affordable for everyone. Deductibles also allow policyholders to have more control over their insurance coverage by adjusting the deductible amount and premium costs.

Types of insurance deductibles:

Fixed deductibles

Fixed deductibles are a specific dollar amount that remains the same regardless of the extent of the loss or claim.

Percentage deductibles

Percentage deductibles are based on a percentage of the total loss or claim amount. For example, if your home insurance policy has a 1% deductible and you have a covered loss of $200,000, you would be responsible for paying $2,000 out-of-pocket.

Split deductibles

Some insurance policies may have separate deductibles for different types of losses. For instance, a homeowner’s insurance policy may have one deductible for wind damage and another deductible for water damage.

Factors to consider when choosing a deductible amount:

Premium Costs

Generally, higher deductibles translate to lower insurance premiums, as policyholders assume more of the financial risk.


Choose a deductible that you can comfortably afford to pay in the event of a claim. Consider your financial situation and savings when deciding on the appropriate deductible amount.

Risk Tolerance

Assess your risk tolerance and the likelihood of filing a claim. If you prefer to have lower out-of-pocket expenses but are comfortable with higher premiums, a lower deductible may be more suitable.

Type of Insurance

Different types of insurance may have different deductible options. Consider the specific requirements and conditions of your insurance policy when determining the deductible amount.


Insurance deductibles play a crucial role in insurance policies, allowing policyholders to share the financial risk with the insurance company. By understanding the basics of insurance deductibles, including their purpose, types, and factors to consider when choosing a deductible amount, individuals can make informed decisions about their insurance coverage. Evaluating affordability, risk tolerance, and the specific conditions of the insurance policy will help determine the appropriate deductible amount for each individual’s needs.