Car insurance (or any insurance for that matter) can get pretty complicated. It’s easy to feel overwhelmed by all the numbers, terminology, and caveats. But the question we hear the most is — what is a deductible?
Odds are you’ve been wondering this yourself. Well, you’re at just the right place to find out everything about how it works in insurance.
We’ll outline what a deductible does and how it impacts your policy. Not only that, but we’ll also clarify some common confusions with similar terms.
But let’s get started with the basics.
What Is a Deductible in Insurance?
In insurance, the term deductible describes any accident-related expenses you pay for out of your pocket. You and your insurer usually agree upon the deductible size when outlining your policies.
In case you have an accident, your insurer covers the costs of medical or repair bills. However, the company isn’t responsible for all expenses. Instead, it expects you to pay a portion of it.
To give you an even better understanding of the deductible definition, here is a hypothetical situation.
Let’s say a natural disaster causes damages worth $2,000 to your house. If your home insurance deductible is $500, then your provider will pay $1,500 for the repairs. You have to cover the remainder.
That might sound unfair to some of you. After all, you pay your insurer to have your back in precisely this kind of situation. So, what’s a deductible for?
Here’s the logic behind it — insurers use deductibles to disincentivize what they call “moral hazards.” In other words, they don’t want the insured to act recklessly, knowing their policy will eliminate any financial consequences.
But deductibles do more than prevent people from getting into risky situations. They also protect insurers from being swamped with claims for every little thing.
What Is a Deductible in Health Insurance?
In health insurance, people pay for services themselves until they reach the agreed-upon annual deductible sum.
Here’s an example to clear things up. A beneficiary with a $1,000 deductible pays $400 for a broken ankle treatment in 2021, which goes toward meeting the deductible. Later in the same year, they need a $5,000 kidney stone surgery. They have to pay the remainder of the deductible — $600. The insurer covers the rest of the procedure price — $4,400.
What Is a Deductible in Car Insurance?
In the car insurance business, deductibles are a way to bill the insured driver for a portion of the accident-related costs. So, if you get into a car crash that results in $6,000 in expenses, and your deductible is $1,000 — your insurer would cover $5,000.
The average deductible in car insurance is $500, but it can go way up. Some people have over $2000 or, similarly, way less — $250. The insurer usually offers you a choice.
Auto insurance doesn’t have an annual deductible, which is a common practice in health insurance. Instead, policyholders pay it on a per-case basis. So if you get in a car crash today and a month later, you have to pay a deductible for both accidents.
Another difference between the two insurance types is who needs them. As per the Affordable Care Act, all US citizens must have health insurance, while only drivers need the auto policy.
What Is Collision Deductible Waiver?
Collision deductible waivers (or CDW) ensure that you don’t need to pay your deductible if you are in an accident with an uninsured driver.
Eligibility for CDW comes with a few conditions:
- There must be another driver involved
- The uninsured driver must be responsible for the accident
- If the crash is a hit-and-run, you need to pay your car insurance deductible
- You need to pay an extra fee every month
- You must prove the accident wasn’t your fault
Do You Really Need a CDW?
Due to the above-described conditions, the chances you’ll be eligible for a CDW claim are slim. Some people would argue that a more expensive policy with a lower deductible is a better investment.
But if you’d rather be safe than sorry, you should consider the option.
How Do Deductibles Work?
Now that we’ve established what deductibles in car insurance are, we can get into the details of how they work.
When Do You Pay Your Deductible?
Usually, the insurer takes away the deductible before paying off the claim you filed. That way, you don’t have to send checks to the company but only receive the subtracted total.
For example, with $4,000 in repair costs claim and a $500 deductible, the insurer pays $3,500.
Nonetheless, some companies request you pay your deductible separately, typically after taking care of all repair and medical bills.
What Happens if Your Auto Insurance Deductible Is Higher Than Your Damage Cost?
When the cost of repair is lower than the deductible, the insured party normally pays for it.
So if you, let’s say, scratch your bumper, resulting in $50 repairs, and your deductible is $500, you would pay the whole bill.
What Happens if You Can’t Pay Your Car Insurance Deductible?
In case you can’t afford your deductible after an accident, you have a few options:
- Wait until you get some extra money to file a claim.
- See if the mechanic would be able to waive your deductible.
- Find a more affordable car shop.
- Take out a personal loan.
- Tap into your emergency funds if the damage is critical and repair is urgent.
Who Pays for the Car Insurance Deductible?
When a car accident occurs, the driver at fault is responsible for paying the deductible. Alternatively, should no one be found guilty, each party must pay for their car insurance deductible.
But, sometimes, the responsible party is uninsured or underinsured. Then, the no-fault driver may ask their insurer to cover the difference between theirs and the guilty party’s deductibles.
Deductibles and Coverages
The deductible depends on the coverage relevant to the accident, and some don’t have it at all.
Liability coverages don’t include deductibles, but comprehensive and collision do. Of the two, comprehensive comes with a cheaper deductible, meaning you’ll have to pay more for collision deductibles.
Can You Have Zero Deductibles?
Some insurers offer zero-deductible policies. As you can imagine, these tend to cost more than standard policies.
The kind of coverage you can have without deductibles depends on the insurer and state laws. For example, a state may mandate that coverage for uninsured motorist property damage or personal injury protection (PIP) includes a deductible.
Another way to avoid paying for a deductible in car insurance is to get a Collision Deductible Waiver. Assuming you’re eligible, a CDW is a policy that relieves you of that responsibility.
You can successfully file for a CDW only in a few specific circumstances.
Is Car Insurance Tax Deductible?
Car insurance can be tax-deductible if you satisfy certain conditions. For example, self-employed people can make their auto insurance tax-deductible via the “Actual Vehicle Expenses” method. They can include the following expenses:
- Tolls and parking fees
- Car repairs
- Lease payments
- Garage rent
- Registration fees and licenses
But is auto insurance tax deductible only for the self-employed? As it turns out, no. The below demographics also qualify:
- Fee-basis state or local government officials
- Armed forces reservists who travel up to 100 miles away from home
- Certain performing artists
What Does Deductible Mean in Relation to Similar Policies?
Having discussed what is an insurance deductible, we should clarify the differences between it and other often confusing terms.
Let’s start with the most common fumbles — comparing deductibles with out-of-pocket expenses, copay, and coinsurance.
Deductible vs. Out-of-Pocket
A deductible is the amount of money insurance companies determine for their customers to pay for accident expenses. You and your provider agree on a set figure before signing the policy.
On the other hand, out-of-pocket expenses refer to everything you pay without the help of your insurer. Drivers usually resort to paying out-of-pocket after minor accidents with low repair costs.
Considering the insurance deductible definition, the point of confusion is evident. The two terms describe covering expenses from your funds.
But the distinction is that deductibles only apply when you get your insurance company involved. In contrast, you pay out-of-pocket on your initiative without consulting with your provider.
Deductible vs. Out-of-Pocket Max
You’ll usually hear an “out-of-pocket maximum” in regard to health insurance. It describes the total expenses policyholders pay for — typically through deductibles, coinsurance, or copays — before receiving their insurance benefits.
So, what is the difference between deductible and out-of-pocket maximum in practical terms?
First, the out-of-pocket max will always be larger than the deductible. And second, it includes deductibles, along with other expenses. It represents your monetary obligations towards the insurer. Once you reach this maximum, your insurer will pay every following covered expense.
What it doesn’t include, however, is premium costs, balance billing, and medical services not covered by your insurance.
Deductible vs. Copay
Copay is a feature of health insurance. It entails paying a fixed sum for particular services, such as visiting a specialist.
Health insurance beneficiaries pay their deductibles yearly. And what is a deductible as opposed to a copay in this case?
A deductible in healthcare is a fixed amount you pay annually before your insurer steps in. In contrast, a copay is an out-of-pocket expense that varies based on the service provided.
Much like deductibles in auto insurance, the size of your copay will impact your premium. For example, you could have a $5 copay for prescription drugs or $15 for visiting the doctor for a checkup. Higher copays usually entail a lower annual fee.
What Is Coinsurance?
There’s one more feature many people confuse with deductibles — coinsurance. You won’t find it in car insurance often, but it’s prevalent in health and property policies.
In essence, coinsurance is a percentage-based form of cost-sharing that customers pay their insurers.
The typical coinsurance split is 20/80, but it can vary. That means you pay for 20% of a claim, while the insurer handles the remaining 80%.
What is insurance deductible, and what is coinsurance? The main distinction is that people pay for their coinsurance on top of their deductibles. Let’s do a little math.
For instance, an insured person has to pay 20% of the $5,000 needed for vehicle repairs, and they have a $1,000 deductible. That means they’re responsible for 20% of the price without the deductible. In that case — 20% of ($5,000 – $1,000) — $800.
Essentially, the insured pays $1,800 for the repairs with the deductible while the provider covers $3,200.
Why Does Coinsurance Exist?
If we consider what is a deductible for insurance, then what role does coinsurance play?
While deductible discourages risky behavior, coinsurance penalizes policyholders for underinsuring their property or health.
For example, a person places $1 million insurance (20/80 coinsurance) on an office space which would cost $1.5 million to repair. The insurer only covers 80% of $1 million — $800,000 minus the deductible when repairs are needed.
That leaves the beneficiary with a considerable sum of out-of-pocket expenses. Had they insured their property all the way, that wouldn’t be the case.
What Is a Deductible — Wrap Up
Being aware of what a deductible is and how it affects your insurance premium is of utmost importance. Hopefully, our guide helped you make sense of all confusing terms and how they relate to each other.
A deductible is an agreed-upon sum that you need to pay your insurer, which conditions vary depending on the policy type. Its purpose is to discourage negligence from the insured. You may have no charge after the deductible, or you may need to pay per accident.
Out-of-pocket is what you pay in case of an accident without involving your insurance company. At the same time, out-of-pocket max includes your deductible and all other expenses you owe the provider.
Copay and coinsurance are out-of-pocket expenses with different functions.
People Also Ask
Such deductible means you have to pay $1,000 of the car accident expenses.
For example, it costs $5,000 to repair a car, and you have a $1,000 deductible. In that case, you pay $1,000 of the overall sum, while your insurer covers the remaining $4,000.
Deductibles are money insurance beneficiaries have to contribute to medical or auto repair bills. The sum is agreed upon when signing an insurance plan.
Depending on the type of insurance, deductibles work differently. For example, in health insurance, deductibles are a fixed annual amount users pay before applying their coverage.
Meanwhile, in car insurance, deductibles work as a set sum that beneficiaries must pay for every accident.
Since the average size of a car insurance deductible is $500, it’s reasonable to consider $3,000 a lot.
The tradeoff with high deductibles is that they go hand-in-hand with lower premiums. Consequently, cheaper premiums lead to higher deductibles.
Deductibles are a set amount of money people contribute for damages caused by a car accident. Different coverages have different deductibles. You and your insurance company agree on the size.
Your insurer typically subtracts your deductible from the coverage when accepting your claim.
What is a good deductible ultimately depends on your needs.
Generally speaking, a lower deductible is usually more helpful. That is because it is more likely to be less than your repair costs. Therefore, your insurance will cover more of your bills. On the other hand, lower deductibles mean higher premiums.