Situation Analysis
Understanding deductibles for home and auto insurance.

Choosing Insurance Deductibles

Choosing Insurance Deductibles


I am reviewing my homeowners and auto insurance policies and am a bit confused by deductibles. It seems that policies with higher deductibles have lower premiums. How should I look at this?

Let's start with the basics.

Insurance provides protection against unforeseen losses. For most types of insurance (auto, homeowners, renters), people buy policies to protect against large or catastrophic losses, such as fire, accidents, theft or liability.

Health insurance is a bit different because in addition to protection against major health problems, we tend to have medical costs on a more frequent basis for exams, medicine and preventive measures.

Deductibles are the amounts you pay before the insurance company starts paying. In essence, the deductible is the portion of risk you are willing to assume. It is only logical that if the insurance company only starts paying after you have already covered part of the cost, they can charge a lower premium.

Here are three questions you should consider when considering choosing a deductible:

  • How much risk are you willing to assume?
  • How much risk should you take?
  • How much are you willing to pay for different levels of risk?

Periodically you should review your insurance coverage to make sure you are adequately covered and that you are not paying for insurance you do not need. With your homeowners or renters policy, increasing the deductible from $250 to $500 or $1000 may reduce your premiums by up to 20%. The savings from increasing the deductibles for collision and comprehensive coverage on your auto policy may save you even more. Here is a chart that can help you review your choices. Call your insurance agent and get quotes for coverage with different levels of deductibles.

Insurance Policy Current deductible Current premium Premium with deductible of $500 Premium with deductible of $500
Homeowners or renters $ $ $ $
Auto - collision coverage $ $ $ $
Auto - comprehensive coverage $ $ $ $

Choose a deductible level that you can comfortably accept if you have a loss. But as the chart can show, the reduction in premiums from larger deductibles may be meaningful.

Another insurance topic you may want to consider is a personal umbrella liability policy. Most homeowner and auto policies provide some level of liability coverage. Additional liability coverage, which would kick in after your other coverage, may be available very cheaply. For less than $200 per year, many individuals are able to buy a $1 million personal umbrella insurance policy. Ask your agent about this type of policy.

Make sure you are properly insured. But do not pay for insurance you do not need.

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