What Is an Insurance Deductible and How Does It Work?

Your insurance deductible is the amount you pay out of pocket before your insurance kicks in. It's one of the most important numbers on your policy, and choosing the right deductible can save you hundreds of dollars per year, or cost you thousands when you need to file a claim.

How Deductibles Work

Let's say you have a homeowners policy with a $1,000 deductible. A storm damages your roof and the repair costs $8,000. You pay the first $1,000, and your insurance covers the remaining $7,000. If the damage only costs $800 to fix, you'd pay the full amount yourself because it's below your deductible.

Higher Deductible = Lower Premium

There's a direct relationship between your deductible and your premium. A higher deductible means you're taking on more risk, so the insurance company charges you less. Moving from a $500 deductible to a $2,500 deductible can reduce your premium by 15% to 30% depending on the carrier and policy type.

How to Choose the Right Deductible

The right deductible depends on two things: how much you can afford to pay out of pocket if something happens, and how much you want to save on your monthly or annual premium. If you have an emergency fund and rarely file claims, a higher deductible usually makes sense. If a $2,500 surprise expense would put you in a tough spot, stick with a lower deductible.

Different Policies, Different Deductibles

Keep in mind that you'll have separate deductibles for different policies. Your auto policy has its own deductible, your homeowners policy has another, and some policies have special deductibles for wind, hail, or hurricane damage. Make sure you understand all of them.