Do You Have The Right Insurance Deductibles?


Insurance is an important part of your overall financial well-being. Auto insurance, life insurance, renter's insurance, homeowners insurance -- they're all important. Most types of insurance policies feature deductibles, a specified amount of money that the policyholder must pay towards the total amount of any claim.

The amount of deductible that is right for you is a very individual question, and it is important that you understand all of the ramifications of the amount of deductible you select. The deductible amount has an effect on your premiums in a couple of ways.

The first, and most obvious, relationship is that the amount of your insurance premium is directly related to the amount of your deductible. Higher deductibles equal lower premiums. For example, I did some investigating on the insurance on one of my rental properties. The premium goes down about $200 per year if I raise the deductible from $1,000 per incident to $2,000 per incident.

To me, this is great. I've owned the house for 20-odd years and not yet had a claim. That's $4,000 in saved premiums that can be used towards a higher deductible.

The other side of the coin is a little less obvious. Higher deductibles mean that you're less likely to make a claim, which means that your rates stay low based upon your claims history.

Let's say you back into your mailbox and do about $1,000 worth of damage to your car. If you have a $250 deductible, you might consider making a claim, thereby losing your claims-free discount and increasing your premiums for several years. If you have a $1,000 deductible, you're not going to bother to make a claim because the deductible is as much as the repairs. Therefore, you maintain your claims-free discount.

Everyone's situation is different, so there are no right or wrong answers. Most financial advisors recommend the highest deductible you can possibly afford, and that you sock the saved premiums into your deductible savings account so that you can continue to raise the deductible.

The snowballing effect can bring your insurance costs down quite dramatically. Understanding all the ramifications of your deductible choices is the only way to ensure that you make smart choices.

If you're not sure what deductible is right for you, talk with your insurance representative or a financially savvy friend for advice.

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