What is an insurance deductible?

When it comes to our home and auto insurance premiums, what we pay is based on a number of factors. This includes the level of risk you bring, the area you live in, your insurance experience, and the deductible you’re willing to pay when making a claim. The higher the deductible, the cheaper your premium as the insurance company’s financial liability is lower.

But what exactly is an insurance deductible and how can you decide what’s right for you? Here’s what you need to know.

What is an insurance deductible?

An insurance deductible is the amount of money you’re expected to pay out-of-pocket in the case you make a claim. Insurance covers your costs minus the deductible. For example, if your deductible was $500 and you had a claim of $5,000, you would cover the first $500 and insurance would cover the remaining $4,500, provided the event is insured. The purpose of the deductible is to discourage clients from making smaller claims. This keeps costs down for the insurance company and by extension, premiums are lower as well.

How do insurance deductibles impact premiums?

The higher the deductible, the lower your premium will be. This is because you as the client are taking on more risk by covering more of the first portion of the claim. For lower deductibles, premiums will be higher. This is because policyholders are more likely to make smaller claims as their out-of-pocket expense is not as high.

What is the right insurance deductible for me?

There are several things to consider when choosing your deductible. A higher deductible means you’re more than likely willing to pay for smaller damages on your own, rather than using your insurance privileges. For example, it would make little sense to claim for an auto repair that costs $600 when the first $500 is your deductible.

As well, you should consider the value of the item you’re insuring. If it’s more than likely that you would only make a claim on a large expense, a higher deductible is the better choice.

Finally, you have to consider your personal financial situation. The best advice is to always have insurance that protects you when the unexpected happens. But if money is tight, a higher deductible with lower premiums may be the best for your cash flow situation.

What is a disappearing deductible? 

This is a deductible that’s reduced the longer you remain claim and accident-free. If you’re with a company for an extended time, it can be their way of rewarding you for your loyalty and good track record. The disappearing deductible is often referred to as a vanishing or diminishing deductible. It essentially rewards drivers (and possibly, homeowners) for good behaviour. This doesn’t always happen automatically – it may be an endorsement that can be added to our policy when you first sign up.

What is zero deductible insurance? 

If you have zero deductible insurance, any eligible claim you make will be entirely covered by your insurer. Generally speaking, zero deductible insurance is a more common option for auto and travel insurance. The low-risk insurance will be reflected in higher premiums paid out by the customer.

How does an auto insurance deductible work?

The most common auto insurance coverages that have deductibles are collision insurance and comprehensive insurance. This means that when you make a claim under one of these two, you'll need to pay out your set deductible out-of-pocket. 

Do I pay my car insurance deductible if I’m not at fault?

If you are in a car accident that was not your fault, you will not have to pay the deductible to have your car repaired. This will be covered by the at-fault driver. If you’re at fault, your repair will be covered if you have collision coverage, but you will be responsible for the deductible amount.

Read more: Understanding your car insurance deductible

How does a home insurance deductible work?

When you make a claim for loss and damage under your home insurance policy, you will have to pay the deductible. This is something to consider if you have a higher deductible. Making a claim (or several claims) can also impact your premiums when you go to renew. So before you file claims for minor events, make sure it'll be worth it in the long run. 

The bottom line

Insurance deductibles are a simple concept – it's the amount of money you'll need to foot before your insurer provides you with the rest when making a claim. You typically get to choose your own deductible (in a set range), and higher amounts will lead to cheaper insurance premiums. 

Also read

Does inflation impact my insurance?

The hidden costs of owning an electric car

How to get cheap travel insurance in Canada