High Versus Low Deductibles: 3 Things to Consider

Buying insurance is a risk-sharing proposition. Both you and your insurer are hoping that nothing will happen to require you to make a claim against your policy, whether it's automobile, homeowners or any other type of coverage, but you want the protection just in case. It's always better to have it and not need it than to need it and not have it.

An insurance company assumes the risk of your house burning down or being robbed (homeowners coverage) or your vehicle being in an accident or stolen (auto insurance) in exchange for a specified amount of financial consideration called the insurance premium. These insurance policies also include insurance deductibles, which is the amount of money you, as the policyholder, must pay out-of-pocket before the insurer pays on a valid claim. Insurance deductibles are your way of sharing some of the risk with your insurer and the amount for which you'll be responsible is your choice. You may opt for a high deductible, a low deductible or, in some cases, even a zero deductible. Here are some things to consider when making your choice:

1. The amount of your deductible is the amount of risk you're willing to share with your insurer against a loss. Insurance companies prefer higher insurance deductibles since the higher the deductible the lower the risk they're covering.
2. Higher deductibles equal lower premium payments. Experts agree you should pick a deductible that's as high as you can reasonably afford to pay out-of-pocket in the event you suffer a loss. You may consider taking the savings you'll save on premiums and invest it in measures that increase your safety, such as burglar alarms or high-tech fire alarm systems. These will not only lessen your chances of suffering certain losses but may also qualify you for a premium discount from your insurance company.
3. There's a current trend toward higher deductibles and many experts agree that choosing too low of a deductible is a characteristic mistake of those buying insurance. Typical homeowner's insurance policies are purchased with a $500 or $1000 deductible. For a home insured for one million dollars, upping the deductible to $2,500 could mean annual savings of up to $300. Savings on a $5,000 deductible policy could be double that.

Whatever you choose, your deductible should be an amount that you'd be able to pay without undue hardship in the event of a claim.