Why do insurance deductibles exist?
Deductibles exist for a few key reasons. First, they keep premiums lower. By sharing some of the financial responsibility, insurers can offer more affordable policies.
Secondly, deductibles discourage small claims. Would you file a claim for a $300 fender bender if your deductible was $500? Probably not. Deductibles also encourage responsible behavior. Knowing you'll have to pay part of the repair bill is more likely to make you be a careful driver and proactive homeowner.
How insurance deductibles work
Generally speaking, a lower deductible means you’ll have a higher premium and pay less in the event of a claim. On the other hand, if you choose a higher deductible, you’ll lower your insurance cost but have to pay more if you need to file a claim.
Keep in mind that choosing a deductible involves balancing upfront costs with potential future expenses.
How auto insurance deductibles work
With auto insurance, different types of deductibles can come into play when you have additional coverages on your policy. If you have physical damage coverage (this includes collision and comprehensive), this will mean that you’ll have a deductible (or two).
Most people choose to have both collision and comprehensive coverage. With this combo, there will be separate deductibles if you make a car insurance claim. For example, you could have a $500 collision deductible (which would apply in an at-fault accident) and a $300 comprehensive deductible (which would apply in other events, such as if your car was stolen or vandalized). Your insurance provider may have set deductible amounts or you may get to pick which deductible works best for you.
There are also cases under your auto policy where you may not have to pay. For example, if you have comprehensive coverage and get a stone chip in your windshield, this could be repaired without needing to pay out-of-pocket. The same goes for fire and lightning damage. Or if your entire vehicle is stolen (you'll still need to pay in Ontario and Quebec in this situation).
How home insurance deductibles work
With home insurance, the size of the claim can determine if you need to pay your deductible or not (except for in the case of earthquake coverage). Many home insurance companies offer a deductible waiver, which means that once a claim goes over a certain amount you won’t have to pay the deductible. This amount can differ among insurers, as well as depend on your level of coverage. When a claim happens, a claims adjuster will work with you and other professionals to determine the cost of the loss and if it’s covered.
If you do have to pay a deductible under your home policy, the type of claim will determine how much you’re responsible for paying. It could be a set amount (like in the examples above) or it could be a percentage. Get familiar with your home policy so you’re not surprised in the event of a claim.
Who decides my insurance deductible?
You decide your insurance deductible based on your financial situation. Your insurance company will suggest a minimum and maximum deductible amounts for you to choose from. For example, you may have a set deductible of $1,000, or you may be able to choose between $500, $1,000, or $2,000. All of this will depend on your insurer, what you’re insuring and other factors.
Ultimately, when it comes to which deductible amount to pick, it’s up to you. Ask yourself how much you are comfortable paying if something were to happen. Taking on a higher deductible may seem tempting to keep your insurance payments down, but it could put you in a sticky situation if you need to make a claim later on. Everyone’s financial comfort level is different, and yours will likely change over time. The good news is that you can usually adjust your deductibles during your policy term or at renewal.
Also, keep in mind that leasing or financing your car will affect the coverage you need, and the deductibles you can choose. Check out your lease or financing agreement to make sure you meet the requirements. You don’t want to lose your car for having the wrong coverage.
When do I not need to pay a deductible?
Let's explore some common scenarios when you might not have to pay your insurance deductible.
With car insurance, if someone else is at fault for an accident and you make a claim through their insurance, you typically won't have to pay your deductible. Your insurer will try to recover your deductible from the at-fault driver's insurance company. This is often called a "Direct Compensation - Property Damage" claim. Also, some insurers offer deductible waivers for things like a hit and run, meaning they'll cover the entire cost. However, these waivers often come at an extra cost added to your premium.
For home insurance, similar scenarios exist. If a neighbour’s negligence causes damage to your property, like a fire spreading from their house, you can claim against their insurance and often avoid paying your deductible. Certain endorsements come with a separate, lower deductible or no deductible at all. This varies between insurance companies, so check your policy. Some policies also offer disappearing deductibles that reduce every claim-free year. Some insurers may waive your deductible for catastrophic events, though this is less common.
Deductibles are a key part of your policy and significantly impact your price and premiums. Now that you understand what a deductible is and how it works, you’ll be more confident when purchasing and reviewing your home and auto insurance coverages.
