|Deductibles are common in many forms of insurance. They place
responsibility for the initial cost of certain claims - and some of the risk
- back on the insured. Basically, a deductible is the amount you must to pay
out of pocket before the insurance company will step in and pay for the loss
of your property. Say your \$5,000 diamond necklace is stolen. If your policy
has a \$500 deductible, the insurance company will reimburse you \$4,500. If
your policy has a \$1,000 deductible, the company will reimburse you \$4,000.
Insurance companies won't ask you to pay the deductible to them. They will
just subtract it from the amount of the claim.|
But not all aspects
of a policy are covered by a deductible. For example, if
you are found to be liable for another person's medical expenses, no
deductible will apply. Deductibles can allow flexibility when you are
shopping for a policy. They allow consumers to fine tune their risk levels
based how likely they think they are to suffer a loss. Because the amount of
the deductible is directly linked to the premium, the higher the deductible,
the lower the premium.
If you want to lower your monthly premium, or
buy more coverage for less
money, you may elect to have a higher deductible. A higher deductible also
may make sense if you believe that your chances of making a claim are remote
enough to warrant you assuming an extra \$500 of responsibility for any
losses, and paying a lower premium. On the other hand, if you decide that
the extra dollar amount of coverage is worth the higher premiums, you may
elect to go with a lower deductible. This may be appealing if you believe
your chances of having to make a claim are higher; or if you think that the
period following some kind of disaster would be the time when you may least
be able to come up with the extra money to pay a high deductible.
some cases, the amount of your deductible will determine whether you make
a claim at all. If your \$400 bicycle is stolen, and your policy has a \$500
deductible, you won't be able to make a claim because the policy only covers
losses greater than \$500. Conversely, if your bike is worth \$600, you may
decide just to assume the remaining \$100 loss rather than making a claim
against your policy.
Why do insurance companies operate this way?
Deductibles of all amounts give
the insured an incentive to do everything possible to avert disaster, and
make fewer claims. Fewer claims mean the company can keep its rates as low
© 2003 Emerald Publications