Question

Use of Deductibles(int-pt V)

Can you summarize in your own words an article that addresses whether you should use high or low deductibles when buying insurance? How do deductibles affect the premium, and why?

Answer 1

A deductible when buying insurance means the amount which the individual has to pay before getting any claim from their insurance company. This is a general practice with most of the non life insurance companies. For example, if your car's window is broken and you are claiming the insurance for repairing, as per your insurance policy, you have to pay 30% of the cost of the window and rest 70% is paid by your insurance company. That clause (out of pocket cost of 30%) is known is deductible attached with your car insurance.

Both high and low deductibles have their pros and cons and choice between the two depends on different factors in different type of insurance.

If you go for a high deductible plan, then the most important benefit for you is the low premium amount. Moreover, if you are a young, this practice is beneficial in case of health insurances because you are less likely to claim your insurance. By this, you will enjoy the benefits of lower premiums for a number of years which will increase your savings. However, if you are getting auto insurance, then chances of claiming the insurance is high due to high accidental rate for youngsters (based on surveys). In that case, a high deductible plan will not be a good practice as you might end up paying more than the insurance company.

In case of a low deductible plan, the individual will be paying less and the insurance company will be paying more and that is the major benefit for the individual. However, in case of low deductible insurance, the premium amount will be higher. This will affect the annual savings of the individual. This is beneficial in case of health insurance if the chances of claiming the insurance if higher (in case of old people).

If the deductible amount is high, insurance companies received maximum amount of claim from the individual. Moreover, they divide peoples in different age groups and ascertain the chances of claim in a year (4-5% in most of the cases)*. This helps them to decide the premium amount. The premium amount is lower than low deductible policies but it is much lower for those age groups who have fewer chances of claims than other age groups. For example in case of a health insurance, the premium amount of high deductible will be lower for younger people and more for older people.

Deductible ascertain the future liability of the insurance company and if the insurance company’s liability is more, it will charge more from the individuals. That's why deductibles are one of the most important clauses in your insurance contract.