What Is a Deductible? Car, Health, Renters Insurance and More

If you’re shopping for car insurance, homeowners insurance, renters insurance, or health insurance, you’ve likely come across the term “deductible.” A deductible is an amount you’ll pay before your coverage kicks in.

Your deductible is a set number or amount, often chosen when you pick your policy. But, deductibles work slightly differently for each type of insurance you need. Most policy types have deductibles, with the exception of life insurance policies.

Here’s what you need to know about deductibles and insurance.

In general, you’ll be responsible for paying up to your deductible amount before your insurance policy pays for its share of the costs. For example, if your deductible on your homeowners insurance policy is $1,000, you’ll pay that amount before your insurance policy kicks in and provides you with its benefits.

That’s why even if you have insurance, you’ll still want to have some money set aside for unexpected financial emergencies. This is especially true if your insurance plan has a high deductible, meaning you’ll have to pay more money out-of-pocket before your policy benefits take effect. A high-yield savings account can keep your savings growing with a higher-than-typical interest rate.

Deductibles work slightly differently for all the different types of insurance you have. Here are the different types of deductibles you’ll encounter while shopping for insurance:

• Car insurance deductibles: Car insurance deductibles apply for each separate claim you file when you’re at fault. You’ll pay the amount you agreed to when you bought the policy, and your insurance will cover the rest. There may be different deductible amounts for each of the coverage types, including for your comprehensive coverage if you have full coverage car insurance and collision coverage.
• Homeowners insurance deductibles: When there’s damage to your home due to a covered situation, you’ll pay the amount before your insurance company covers the rest. Some homeowners insurance policies have a percentage-based deductible where the deductible is a percentage of your home’s insured value, while other policies have a set dollar amount for a deductible.
• Renters insurance deductibles: Like homeowners insurance, when there’s a qualifying loss, you’ll pay for this amount before the coverage kicks in.
• Health insurance deductibles: Unlike many other types of insurance, health insurance deductibles function very differently. In health insurance, a deductible is the amount you pay for healthcare before your insurance kicks in. However, this is generally an annual limit and can exclude some preventative visits.

Below, we’ll break down more about each of these types of deductibles.

While shopping for car insurance, you’ll need to figure out how high you want your deductible to be. Car insurance companies generally list their available deductible amounts in dollars (as opposed to percentages).

The higher the deductible, the lower the premium you’ll pay each month. The opposite also holds true — lowering your deductible will generally increase the premium. Raising your deductible is one way to lower the cost of your car insurance.

Some insurance companies provide “vanishing” deductibles that get lower over time provided you drive without violations or an accident. Progressive offers this as an option on its auto insurance policies. One of our top picks for auto insurance coverage, Nationwide, also offers a vanishing deductible policy which decreases the deductible on your comprehensive and/or collision deductible by $100 each year you’re accident-free.

While a higher deductible may lower premiums, you’ll want to make sure that you can realistically afford the deductible you choose. If you’re involved in an accident, for example, you’ll need to cover the cost of repairs up to your deductible amount, so make sure doing so won’t put you in financial jeopardy.

You may have several different deductibles on your car insurance policy, especially if you have a full-coverage car insurance policy with several different types of coverage. You might see the following types of coverages on your policy, including:

• Comprehensive coverage: This coverage can repair damage by something other than an accident, like a storm or theft. It also covers damage to your vehicle from hitting an animal.
• Glass coverage: If you’ve elected to have coverage on your car’s glass, it could help to pay for a cracked windshield. You may be required to pay a deductible if you need a repair, though there may be no deductible.
• Collision coverage: This coverage can pay for damage from colliding with another vehicle or an object like a fence, guardrail, or mailbox. It will also require a deductible.
• Uninsured motorist coverage: This coverage can reimburse you if you’re hit by an uninsured driver and generally requires a deductible.
• Personal injury protection: Also called PIP coverage, this can pay for medical payments and lost wages for yourself and passengers, and generally involves a deductible.

There are several situations where you may not need to pay a deductible, such as when you’re involved in an accident where you’re not at fault, or if the claim is covered under your car insurance’s liability coverage.

If an event covered by your insurance policy damages your home, your homeowners insurance company will pay for repairs after your deductible.

Homeowners insurance deductibles can be set in dollar amounts. It could also be a percentage of your home’s insured value. For example, if you have $300,000 of home insurance coverage and a 2% deductible, your deductible will be $6,000.

Homeowners insurance sometimes offers the opportunity to waive deductibles on large amounts of damage. Nationwide, our overall top pick for homeowners insurance, offers waived deductibles for covered losses over $50,000 on their Private Client homeowners policy with a protection endorsement.

You may also have a deductible for other coverages on your home. Usually, you obtain these types of coverage through insurance policies separate from your homeowners insurance policy. However, sometimes additional coverages are included with your homeowners insurance. Some common types of coverage include:

• Earthquake insurance: Homeowners insurance generally doesn’t include earthquake coverage, but a separate policy might. These policies may have their own deductibles, and can be higher than a typical homeowners insurance policy — the Insurance Information Institute estimates that earthquake insurance deductibles range from 5% to 15% of the policy’s limit.
• Flood insurance: Since most policies don’t cover flooding, you usually purchase flood insurance separately from your homeowners insurance policy. You may need to pay a deductible for both your home’s structure and its contents.
• Hurricane insurance: This coverage can help repair your home if it’s damaged in a hurricane, and deductibles tend to be a percentage of your home’s value.
• Wind and hail deductibles: If you live in an area that’s prone to wind and hail damage, you could pay a special wind and hail damage deductible on your home’s policy, usually between 1% and 5% of your home’s value.

Renters insurance covers your personal belongings, including damaged and stolen items. It can also cover your liability if someone gets injured in your home (for example) and can help cover expenses if something forces you to relocate from your house or apartment.

Like with homeowners insurance, your renters insurance deductible will apply if you need to make a claim. Unlike homeowners insurance, there’s generally only one deductible for all covered situations.

If you’re considering renters insurance, several companies offer it with a range of deductibles. CNBC Select’s top pick for renters insurance is Lemonade, which offers a variety of deductibles to fit almost every financial situation. Progressive is also highly rated on our list of renters insurance for a wide variety of discounts, including one for bundling policies.

When you’re choosing a health insurance plan, you’ll likely want to consider the deductible.

In health insurance, the deductible is an annual amount that you’ll need to pay before your health insurance starts to cover your expenses. It’s different from copayments and coinsurance — copayments are flat fees you’re responsible for after receiving a service, while coinsurance is the percentage of the cost you have to pay for a service. Both usually go towards your maximum out-of-pocket amount, which (as the name implies) is the most you have to pay yourself during any given year. When the year is over, both your maximum out-of-pocket amount and your deductible reset.

When you choose a healthcare plan, high-deductible healthcare plans have the most affordable premiums. But, these plans could make for a large expense if you’re faced with an expensive health situation. A lower deductible healthcare plan could have higher premiums that could cut into your budget. You’ll want to consider your health situation on top of your financial situation to determine which one is right for you.

Only you can determine whether a higher deductible is better for your finances than a lower one. But here’s what you should ask yourself to help you figure that out:

• Can I afford to pay out of pocket up to the deductible amount without hampering my other financial goals?
• How much are the premiums for a policy with a lower deductible? Am I comfortable making those payments each month?

Your deductible is the amount you pay out of pocket before your insurance takes effect. While higher deductibles can lower the cost of your premiums, they may not make sense if they cause you financial hardship in the event you have to pay. Consider your financial situation to determine the right deductible for you.