In times of need, insurance can provide vital financial security by paying for property damage, auto repairs, or medical expenses. However, the idea of deductibles is one that frequently perplexes policyholders. Before your insurer starts to pay the remaining portion of the claim, these are the sums you have to pay out of pocket. Making intelligent choices when purchasing or renewing insurance requires an understanding of how insurance deductibles operate across health, auto, and homeowners’ policies.
Let us begin with what exactly an insurance deductible is, and then assist you in getting deeper insights.
What is an Insurance Deductible?
An insurance deductible is money that you have willingly agreed to spend yourself before your insurance provider begins paying for the costs. Deductibles may be assigned per claim or per annum, depending on the nature of the insurance policy.
Generally, deductibles and premiums are inversely related: as the deductible increases, the premium decreases, and conversely, a lower deductible leads to a higher premium.
This structure discourages policyholders from making small or frivolous claims, which reduces administrative costs and maintains the insurance system in good health.
Example:
Suppose an automobile insurance policy is taken by an individual with a deductible of ₹10,000. If you have an accident that causes ₹50,000 worth of damage to your vehicle:
- You pay ₹10,000.
- Your insurer pays ₹40,000.
Types of Insurance Deductibles
1. Standard (fixed) Deductible:
The insured must make a predetermined, fixed out-of-pocket payment before the insurance policy coverage begins. It is most prevalent in health and auto insurance, and stays the same for each claim. Although it provides predictability, it doesn’t change according to the claim’s value.
For instance, if your hospital bill is ₹60,000 and your health insurance has a ₹10,000 deductible, you pay ₹10,000 and the insurance company pays ₹50,000, assuming all other policy conditions are met..
2. Percentage Deductible
A percentage of the entire amount insured is used to compute this kind of deductible.
It is typically used in home or property insurance, particularly in claims involving natural disasters. As the insured value increases, the deductible amount also increases proportionally, which may result in higher out-of-pocket costs for the policyholder in the event of a claim.
For instance, you have to pay ₹2 lakhs before the insurer covers the remaining amount for damage if your home has ₹1 crore insurance with a 2% deductible.
3. Voluntary Deductible:
It is decided to lower premium payments by agreeing to pay more when a claim is made by the policyholder. In addition to the mandatory deductible, there is an optional deductible.
Although higher voluntary deductibles lower your premium, they increase the amount you must pay out of pocket when filing a claim.
For example, if you choose a ₹5,000 voluntary deductible and your policy includes a ₹2,000 compulsory deductible, and you file a claim for ₹25,000 in repair costs, your total out-of-pocket expense would be ₹7,000 (₹5,000 voluntary + ₹2,000 compulsory). The insurer would then pay the remaining ₹18,000.
4. Compulsory Deductible
The policyholder is required to pay this non-negotiable sum, which is established by the insurer, for each claim. It is intended to stop small or frequent claims and is applicable regardless of the size of the claim. It is set according to the vehicle type and engine capacity and is typical in auto insurance.
For instance, you pay ₹2,000 and the insurer pays ₹18,000 if your auto insurance has a ₹2,000 mandatory deductible and the cost of damage repair is ₹20,000.
5. Cumulative Deductible
It is suitable for a family or group when the entire group is subject to the deductible. Only when the group’s total medical costs surpass the deductible does the insurer begin to pay. It is helpful for employer-sponsored plans or cost-sharing in families.
For instance, the cumulative deductible for a family floater policy is ₹50,000. After the threshold is reached, the insurer will pay ₹10,000 for medical bills totalling ₹60,000 for the parents and child.
Example of Deductibles for different Insurances.
In this section, we shall understand the concept of deductibles in relation to various common types of insurance.
Deductibles for Health Insurance:
A health insurance deductible is the amount a policyholder must pay out-of-pocket annually before the insurance company begins to cover eligible medical expenses.
For instance, if ₹8,000 is your deductible, you must pay it before the insurance will pay for anything else.
Deductibles for Car Insurance: In motor insurance, a deductible is the amount you pay per claim, whether for own damage due to collision or non-collision events.
If your comprehensive car insurance has a ₹6,000 deductible and your car is vandalised, you’ll pay ₹6,000 out-of-pocket, and the insurer will cover the remaining damage, subject to policy terms.
Deductibles for Home Insurance: In home insurance, a deductible is the amount you must pay before the insurer covers losses caused by events such as fire, natural disasters, or theft.
For example, if your home is insured for ₹10 lakh and there’s a 2% deductible, you would pay ₹20,000 out-of-pocket before the insurance company starts paying for repair or replacement.
Advantages of a High Deductible:
- Reduced monthly payments
- Affordable for healthy people with few medical requirements
- Advised for good and low-risk drivers with a commendable driving record
- Promotes appropriate utilisation of insurance
- Can save money by lowering ongoing insurance expenses
Disadvantages of a High Deductible:
- Increased out-of-pocket costs at claim filing
- Financial difficulties during crises, if one has little savings
- Not suitable for those with chronic health conditions or higher risk categories
- May discourage legitimate claims because of initial expenses
Bottomline
Understanding the workings of insurance deductibles can greatly enhance your financial readiness and policy selections, even though they may initially appear complicated. They have a significant impact on both your monthly and yearly premiums and the amount of your claim settlement. You can better balance cost and coverage by choosing the appropriate deductible based on your risk tolerance and financial security, guaranteeing that you’re fully covered when it counts most.
Written by: Tanya Kumari
