Raising your deductible shows up on every list of ways to save money on insurance, usually with the caveat that you need to be able to afford it if you need to pay it. And while both of these points are true — it will save you money, and it is essential to be able to afford it — there’s more to it.
Deductibles are designed to put part of the financial burden of repairing damage on the owner. That’s true for both auto and home insurance. Unlike health insurance, you pay a deductible every time you file a claim.
To policyholders, the deductible is another way for the insurance company to avoid paying. To insurance companies, it’s a tool to prevent policyholders from filing small, frequent claims. Both are correct, but there’s more to understand about deductibles and why you should carry a larger one than you likely do.
Why aren’t premiums enough?
You pay premiums for your insurance; that’s the cost of your insurance, right? There are few other transactions where you pay for a service and then have to pay a little more when that service is provided. If you buy a new TV, you get a new TV. It doesn’t arrive with a bill for just a little extra before it can be delivered. So why isn’t insurance the same?
When you buy a TV, you pay for the value of that TV. You get a $500 TV if you buy a $500 TV. Insurance doesn’t work that way.
Let’s say you pay $3,000 a year for home insurance. You’ve paid for one year when a tree falls on your roof. The insurance company pays $30,000 to repair it. It has now paid 10 times what you paid for the coverage. Even if you have a $1,000 deductible, the insurance payment does not equal what you put in.
Now, let’s say that a branch falls instead of a tree falling, doing minor damage. The damage amounts to $800, below your deductible. You pay for the repair yourself.
But why not file a claim if you didn’t have a deductible? And why not file a claim for every bit of accidental damage that happens? Suddenly, insurance companies are devoting a significant amount of time and effort to small repairs: $800 for a couple of damaged shingles, $500 to replace a stolen phone, $700 to fix a small area of damage from a pipe that suddenly started leaking; it goes on.
The same applies to car insurance deductibles; imagine the costs if people filed claims for every scratch and ding.
If there’s no deductible, there’s no limit on what people will file claims for, which adds up over time, not just in the payments but in the administrative costs. Deductibles prevent this.
But why shouldn’t you be able to file small claims?
It’s fair to argue that you are paying for the coverage and should be able to use it. However, when people file a claim every time there is a minor loss, everyone ends up paying for it.
Insurance creates a pool of funds to be drawn upon when one contributor needs it. Everyone who pays premiums contributes to that pool. When one person has a loss, the insurance company draws from that pool to cover it.
The aim is to create a pool large enough to handle disasters that could place policyholders in an unrecoverable position without insurance. When a wildfire tears through a town and leaves people homeless, there should be enough to rebuild.
Small claims repeatedly dip into the pool for minor, recoverable damages, thereby reducing the amount available to protect everyone in the event of significant damage and increasing insurance company costs.
The result is higher rates as insurance companies work to keep that pool ready for big claims and to respond to the costs of processing large numbers of small claims.
So, why should you raise your deductible?
In a time when insurance rates are going through the roof across the country, increasing the amount you will have to pay out of pocket when you file a claim is a tough sell.
But carrying a higher deductible means you pay less for insurance every year. And although you might need to file a claim before you can realize the savings from that, odds are good that you will save enough over time to not only be able to handle more minor repairs, but also put aside more savings to handle that deductible when you need to.
Furthermore, if more people carried higher deductibles, filed fewer small claims, and treated insurance as originally intended — a safeguard against catastrophic loss — we’d all have a chance of seeing lower rates in the future.
And, every year you pay that lower premium and don’t file a claim, more money stays in your pocket.
It’s essential to have a deductible you can afford, but it should be at the top end of what you can afford. And if you can increase it as you put away the difference, you will save even more.
