What Is a Deductible?
A deductible is the amount of money you agree to pay out of your own pocket before your insurance coverage kicks in. It is your share of the financial risk. The insurer covers costs above your deductible, up to your policy's coverage limit.
Here is a simple example: You have a homeowner's insurance policy with a $1,000 deductible. A storm damages your roof, and the repair costs $6,500. You pay the first $1,000, and your insurer pays the remaining $5,500.
If that same storm only caused $800 in damage — less than your deductible — you would pay the entire amount yourself. Your insurance would not contribute anything because the loss did not exceed your deductible threshold.
Types of Deductibles
Per-Occurrence (Per-Claim) Deductible
This is the most common type in auto and homeowner's insurance. You pay the deductible amount each time you file a claim. If you have two separate car accidents in one year with a $500 deductible, you pay $500 for each incident — $1,000 total.
Annual Deductible
Common in health insurance, an annual deductible is a set amount you pay once per year across all claims. If your health plan has a $2,000 annual deductible and you have a $1,500 lab bill in March, you pay all $1,500 out of pocket. Then in July you have a $3,000 procedure — you pay the remaining $500 of your deductible, and your insurer covers the other $2,500 (subject to coinsurance). For the rest of the year, your deductible is met.
Percentage-Based Deductible
Used primarily in homeowner's insurance for catastrophic events like hurricanes and earthquakes, this deductible is calculated as a percentage of your home's insured value, not a fixed dollar amount.
For example, if your home is insured for $400,000 and you have a 2% hurricane deductible, you would pay the first $8,000 of hurricane damage out of pocket. These deductibles can be shockingly high, so it is important to understand them before hurricane season arrives.
Embedded vs. Non-Embedded (Family Health Plans)
Family health plans sometimes have both an individual and a family deductible. In an embedded plan, once any single family member hits the individual deductible, coverage starts for that person even if the family deductible has not been met. In a non-embedded plan, the full family deductible must be met before anyone gets coverage. This distinction can mean thousands of dollars in difference.
How Deductibles Affect Your Premium
Deductibles and premiums have an inverse relationship: the higher your deductible, the lower your premium, and vice versa. This makes intuitive sense — when you agree to absorb more of the financial risk yourself, the insurer's risk decreases, so they charge you less.
The savings can be significant. Raising your auto insurance deductible from $250 to $1,000 typically reduces your collision and comprehensive premiums by 15% to 40%. On a policy costing $1,800 per year, that could save you $270 to $720 annually.
But there is a breakeven calculation to consider. If raising your deductible saves you $300 per year but increases your out-of-pocket risk by $750 (from a $250 deductible to a $1,000 deductible), it takes two and a half claim-free years to break even. If you go three or more years without a claim — which most people do — the higher deductible pays off.
Choosing the Right Deductible
There is no universally correct deductible. The right choice depends on three personal factors:
- Your emergency fund — Can you comfortably pay the deductible if you need to file a claim tomorrow? If paying a $2,500 deductible would put you in financial distress, choose a lower deductible even if it means a higher premium.
- Your claims frequency — If you tend to file claims regularly (perhaps you live in a hail-prone area), a lower deductible may save you money overall. If you rarely file claims, a higher deductible and lower premium usually wins.
- The premium difference — Get quotes at multiple deductible levels. Sometimes doubling your deductible only saves you $50 per year, which is not worth the added risk. Other times the savings are substantial.
Common Deductible Misconceptions
"I've paid my deductible, so everything else is free."
Not always. In health insurance, after meeting your deductible you may still owe coinsurance (a percentage of costs, like 20%) until you hit your out-of-pocket maximum. In property insurance, your claim payout is also subject to your policy's coverage limits.
"My deductible applies to every type of claim."
Some policies have different deductibles for different perils. Your homeowner's policy might have a $1,000 standard deductible but a separate $5,000 wind/hail deductible or a 2% hurricane deductible. Check your declarations page for the full picture.
"A $0 deductible means I'll never pay anything."
Zero-deductible policies still have exclusions, coverage limits, and potential coinsurance or copays. They also come with significantly higher premiums. In many cases, the extra premium you pay over time far exceeds what you would have paid in deductibles.
"I should always choose the highest deductible to save money."
Only if you can actually afford it. A high deductible you cannot pay is worse than a low deductible with higher premiums. If a $2,500 deductible would force you to put the expense on a credit card at 22% interest, you are not actually saving money — you are borrowing it at a high rate.
A Practical Rule of Thumb
Set your deductible at the highest amount you could pay in cash within 30 days without going into debt or draining your emergency fund below three months of expenses. For many people, that lands somewhere between $500 and $1,500 for auto and homeowner's insurance, and the maximum employer-supported deductible for health insurance through an HSA-eligible plan.
Review your deductible annually. As your savings grow, you may be able to comfortably raise your deductible and pocket the premium savings. If your financial situation tightens, lowering the deductible buys peace of mind.