Insurance Deductibles: High Costs, Low Benefits?

The purpose of insurance is to provide financial protection against unexpected events, such as accidents, property damage, or medical expenses. However, the high cost of insurance deductibles can be a significant burden, leading some to question the value of insurance. Insurance deductibles are the amount paid out-of-pocket by the policyholder before the insurance provider covers the remaining costs of a claim. The deductible amount varies based on the type of insurance, the coverage, and the insurer, with some deductibles being a set dollar amount and others a percentage of the policy limits. While high deductibles typically result in lower insurance premiums, they also mean higher out-of-pocket costs for the policyholder when making a claim. This raises the question of whether it is worth paying for insurance if the deductible is high.

High deductibles = lower insurance rates

A deductible is the amount of money you must pay toward expenses before your insurance plan begins to cover the remaining costs. Deductibles allow insurers to share risk with policyholders. The higher the deductible, the less money the insurance company has to pay out due to a covered claim. This results in lower insurance rates.

For example, if your comprehensive coverage deductible is $1,000 and a hail storm causes $3,000 in damage to your car, an insurance provider would only cover $2,000 of the damage. If you have full coverage car insurance, you’ll pay your deductible to the repair shop when it’s time to pick up your vehicle.

The best deductible amount is an amount that you're comfortable paying in the event of a claim. A high deductible is better if you want to save on your insurance rate, while a low deductible is better if you want more protection from future out-of-pocket costs. Car insurance deductibles typically range from $100 to $2,000. The most common deductible that drivers choose is $500.

When considering high deductible vs. low deductible health insurance, also look at your out-of-pocket maximum. This number reveals the total amount of medical expenses you may pay each year. It doesn’t count your premium payments, but it does include fees like copays and coinsurance. A high-deductible health plan (HDHP) carries a higher deductible, which must be met before your plan benefits kick in for anything beyond in-network preventive care services. A high-deductible plan is any plan that has a deductible of no less than $1,650 for individual coverage and $3,300 or more for family coverage in 2025. Compared to a traditional health insurance plan, a high-deductible health plan comes with a higher deductible and a lower premium.

High insurance rates = lower deductibles

When it comes to insurance, a deductible is the amount of money you must pay towards expenses before your insurance plan begins to cover the remaining eligible costs. For example, if you have an annual deductible of $1,800, you must pay up to that amount towards your medical care for the year before your health insurance covers the rest.

In the context of car insurance, a deductible is the amount you pay "out of pocket" on a claim before your insurance covers the rest. Typically, you have a choice between a low and high deductible. A low deductible means a higher insurance rate, while a high deductible means a lower rate. For instance, if you raise your deductible from $100 to $250, your insurance rate should decrease.

The relationship between deductibles and insurance rates can be understood as follows:

• High Deductible = Lower Insurance Rates: Opting for a higher deductible results in lower insurance rates or premiums. This is because you, as the policyholder, are taking on more financial responsibility in the event of a claim. By choosing a higher deductible, you agree to pay a larger portion of the expenses out of your own pocket before the insurance company covers the remaining costs. As a result, your insurance provider assumes less risk and can offer you a lower rate. This option is suitable if you want to save on your insurance costs and are comfortable with the potential for higher out-of-pocket expenses in the future.
• Lower Deductible = Higher Insurance Rates: Conversely, selecting a lower deductible leads to higher insurance rates or premiums. With a lower deductible, you pay a smaller amount out of your own pocket when making a claim, as the insurance company covers a larger portion of the expenses. Consequently, the insurance provider assumes more risk, which results in higher rates. This option provides greater financial protection against future out-of-pocket costs but comes at the cost of higher ongoing insurance payments.

Ultimately, the decision between a high or low deductible depends on your individual needs and financial preferences. If you anticipate infrequent claims and want to keep your ongoing insurance costs low, a high deductible with lower rates may be preferable. On the other hand, if you seek greater peace of mind and are willing to pay higher rates to minimise potential out-of-pocket expenses, a lower deductible is more suitable.

High-deductible health plans (HDHPs)

In general, a high deductible means lower insurance rates but higher out-of-pocket costs. This applies to both car insurance and health insurance.

A High-Deductible Health Plan (HDHP) is a health insurance plan with a higher deductible than a traditional insurance plan. The monthly premium is usually lower, but you pay more healthcare costs yourself before the insurance company starts to pay its share. This is also known as your deductible.

HDHPs can be combined with a Health Savings Account (HSA), which is a tax-free savings account that allows you to set aside money to pay for certain medical expenses. This is why HDHPs are often called HSA-eligible plans. With an HSA, you can lower your taxable income and pay for expenses such as prescriptions, dental care, and eyewear.

It's important to note that HDHPs may not be suitable for everyone. For example, if you have young children, are undergoing treatment for a condition, or are taking multiple medications, your upfront costs may be higher.

When considering an HDHP, it's essential to review the plan's details, including the minimum and maximum yearly deductible amounts, to ensure it aligns with your healthcare needs and financial preferences.

Hurricane deductible

Insurance is a means of protection against financial loss, and deductibles are an integral part of insurance policies. A deductible is the amount you, the policyholder, must pay out of pocket before your insurance company starts paying its share of the loss. Typically, the higher the deductible, the lower the insurance rate, and vice versa. This means that a high deductible can help keep insurance rates low.

Now, let's delve into the specifics of hurricane deductibles:

In the context of hurricanes, a deductible is a special out-of-pocket charge that homeowners must pay for insurance claims related to hurricane damage. This deductible is separate from the standard deductible in a homeowners policy and is applicable only when there is damage caused by a hurricane or a named storm.

The application of a hurricane deductible depends on the specific criteria set by the insurance company and the state regulations. In some states, a hurricane deductible is triggered when the National Weather Service (NWS) or the National Hurricane Center (NHC) issues a hurricane warning or declares a hurricane watch. The criteria may also include the intensity of the hurricane in terms of wind speed.

Calculation of Hurricane Deductible:

State Requirements:

Currently, only 19 states and the District of Columbia require homeowners to pay hurricane deductibles when making hurricane damage claims. These states include Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas, and Virginia.

Annual Application:

It's important to note that hurricane deductibles are applied on an annual basis. This means that if you experience multiple hurricanes in one year, the deductible will apply to each hurricane, and the amount may vary depending on the specifics of the policy.

Percentage deductibles

Understanding what a deductible is and how it works can help consumers make informed decisions when purchasing insurance and filing claims. A deductible is the amount of money that the insured person must pay before their insurance policy starts paying for covered expenses. For example, if you have a health insurance policy with a $1,000 deductible and you receive a medical bill for $2,000, you would be responsible for paying the first $1,000 and your insurance would cover the remaining $1,000.

A deductible may be a specific dollar amount or a percentage. Percentage deductibles generally apply to homeowners' policies and are calculated based on a percentage of the home's insured value. For example, if your house is insured for $100,000 and your insurance policy has a 2% deductible, $2,000 would be deducted from any claim payment. In the case of a $10,000 insurance loss, you would be paid $8,000. For a $25,000 loss, your claim check would be $23,000.

Some states have specific rules regarding deductibles. For instance, hurricane-prone states may have special deductibles for homeowners' insurance claims attributable to a hurricane. These deductibles are usually higher than standard homeowners' policy deductibles and are calculated as a percentage of the policy limits. Similarly, wind/hail deductibles are often paid as percentages, typically ranging from 1% to 5%.

In the case of auto insurance, you can usually choose between a low and high deductible based on your financial preferences. A higher deductible results in lower rates but higher out-of-pocket costs, while a lower deductible leads to higher rates but lower out-of-pocket expenses.

Frequently asked questions