It doesn't make much sense, does it? You pay your premium every month. And then, when you file a claim, you have to pay even more money — the deductible — before your insurance policy begins reimbursing you.
Why? Because a deductible helps insurance companies guard against what is called a moral hazard. That's just a way of saying that once a risk has no consequences, there's no incentive for people to guard against it.
For example, many people have criticized state-run “high-risk” homeowners programs that guarantee coverage to people living in areas that most insurance companies consider to risky to insure.
Malibu, California — with its high risk of wildfires — is a textbook example. Since the homes are guaranteed to be rebuilt — at the taxpayers' expense — there is less incentive not to live in a very dangerous area. By guaranteeing to provide homeowners coverage in this fire-prone area, the state has created a moral hazard.
Here’s another example: what if you never had to meet a deductible or make a copay to visit the doctor? From an insurance company’s point of view, you’d be more likely to run to the doctor for every little bump and bruise. Of course, not everyone would do that. But insurance companies have to protect against the few people that would... and who would drive up rates for everyone.
The deductible is only one way that insurers try to limit their risk. They also use underwriting — a detailed analysis of the risk a potential policyholder poses.
So with insurance companies guarding against risk, you might think that they have to charge outrageously high deductibles. But that’s usually not the case.
The amount of the deductible depends on the kind of insurance you buy. Health insurance deductibles often start around $500, and can go as high as several thousand dollars. Some homeowners policies can have deductibles as low $100.
Having a high deductible has its advantages, though. A high deductible usually means lower premiums. That saves you money from month to month — but could leave you stuck having to pay big chunk of money if you ever have to file a claim. It’s not an “either/or” situation, though. Many policies have flexible premium and deductible arrangements.
What kind of deductible arrangement is right for you? To learn more about your options, work with an insurance agent. To get matched with agents in your area, fill out our short form for free insurance quotes.