Deductibles can be defined as the amount of money a policyholder has to pay out of their pocket for damages or loss suffered before the insurance company settles the claim. If a claim is filed, the amount considered will be subtracted from the total amount claimed. Let’s assume, you have deductibles of $1,000 and file for a claim of $100,000, the insurer will pay you $99,000 for that claim.
Deductibles can be classified into two:
- Percentage based
- Dollar amount
The difference between the two methods is the calculation. how your property is being valued. Once it has been calculated, the amount attributable to the policy is fixed for the duration of the policy.
How to Choose Deductibles for Your Policy
The best thing to do when taking out policy is to make sure that the deductibles are as high as you can afford within reason. This is because insurers grant lower premiums to policyholders with high deductibles. Although the lower premium may seem enticing at first, when faced with a damage and a high amount coming out of your pocket, it becomes unappealing.
In essence what choosing deductibles does is to balance the short-term cost that you can afford (from your own pocket) and the long-term cost of owning an insurance policy (premium). If you are able to afford a good amount being paid out of your pocket then it means in the long run your premiums will be on the low side. Insurance companies made this option available for companies so as to encourage policyholders of their risk while at the same time reducing costs for the insurer on settling claims.
It also makes sense to raise your deductibles because for most insurance companies, if an insured file a claim, there is an increase in the cost of the premium because the insurer assumes the policyholder is now risky and costly to insure. The more claims you file, the higher your premium. Therefore, keep in mind that if you have a low deductible, then it may not be in your best interest to file a claim.