What is a Deductible?


If you’ve dealt with insurance before, you’re likely familiar with the frequently used term deductible. But if you’re just starting your life as an independent young adult, or if you’ve never filed claim before you may not be familiar with this term. All types of insurance, including medical, homeowners, and automobile insurance have deductibles. What is a deductible, and how does it work?

What is a Deductible?

A deductible is the amount of a bill you are responsible for. Example: You get into an accident and your car is damaged. The repair bill is $3000, and is covered by your insurance policy with a $500 deductible. You are responsible for $500, and your insurance company pays the rest.

Can I Set My Deductible?

You do have some control over your deductible, but it affects your cost. Insurance policies are available with varying deductible levels, such as $250, $500, and $1000. The lower the deductible, the higher the monthly premium.

What Deductible Should I Choose?

The perfect deductible amount would satisfy both of these conditions:

  • Affordable Premium : The premium paid each month must fit in your budget.
  • Less or Equal to Emergency Fund : Ideally, you’d want your deductible to be no more than the amount you have in your emergency fund. Any unexpected event would be paid for using your emergency fund without upsetting your normal budget.

There are times and situations where these two conditions cannot be met. In those cases the deductible should be set as close to your emergency fund value as possible. Many people set their deductible high to pay the lowest possible premium. When unexpected incidents occur, this leaves them with a high out of pocket bill that may be impossible to pay.

Everyone should know what a deductible is, how it works, and how to set it to a value that makes sense for your financial situation.

How about you, EOD Nation, have you reviewed your insurance deductibles lately?

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