What Is a Deductible?
A deductible is the amount of money that a policyholder must pay out of pocket before the insurance company begins to pay their share for losses under an insurance policy. This is a predetermined amount specified in the insurance policy and applies per claim or per incident, depending on the policy terms.
Purpose of the Deductible
The primary function of the deductible is to mitigate the number of small claims that insurers must handle, which can help keep insurance premiums lower for everyone. Additionally, it ensures that the policyholder shares some of the risk with the insurer, which encourages more careful behavior.
Types of Deductibles
Standard Deductible: This is the most common type and involves a fixed dollar amount.
Percentage Deductible: Usually found in property insurance like for homeowners or cyclone insurance, it is calculated as a percentage of the total insurance policy limit.
Example of a Deductible Application
If you have an auto insurance policy with a deductible of $500 and you make a claim for a car accident where the repair costs are $2,000, you will pay the first $500 and the insurance company will pay the remaining $1,500.
Legislation and Regulation
Different jurisdictions may have specific regulations that govern the application of deductibles. For example, in the United States, provisions relating to deductibles are stipulated under state insurance regulatory frameworks, and details can often be found on official state insurance department websites.
Sources and Further Reading
For more granular details and to understand specific provisions pertinent to your region, consult your local Insurance Regulatory Authority or browse through resources available on platforms like the NAIC website or IRMI (Insurance Risk Management Institute).
Understanding how the deductible impacts your policy handling, costs, and claims processing is crucial in managing potential financial liabilities effectively.
