Sometimes it makes no sense to insure a small loss. Why? It could easily be paid out of pocket and deducted from your taxes. Besides, it can end up costing more than your recovery. Policy writing and claim adjustment costs make insuring small losses uneconomical for both sides. Deductibles eliminate small losses and save you premium dollars.
Deductibles also reduce the chance that dishonest people would create losses. If there was no cost to them, they would be more likely to submit a fraudulent claim. No one likes a deductible during a loss. But that deductible may save you more premium dollars than the amount of the deductible. Probably the first one that comes to mind is for a car. Those deductibles of a set number of dollars are called straight deductibles.
There are three other types of deductibles:
1. Aggregate. Adds all losses up to a certain dollar amount. After that, other losses for the policy year are paid in full. That way a business knows its maximum dollar loss for the year.
2. Franchise. Below a certain dollar amount, you pay for a loss. Above a certain dollar amount, the insurance company pays. These deductibles are common in ocean marine insurance where small losses from dampness, pilferage, and similar perils are common.
3. Disappearing. Lives up to its name. When a loss is large enough, there is no deductible.
Tip. Save money! Increase your Deductibles!
More Deductibles?
The few remarks here concern insurance tools that are like deductibles or otherwise control loss payments. Two deductible-like tools are found frequently in health insurance:
1. Elimination or waiting period. Holds loss payments until a certain point is reached. You carry the losses up to that point.
2. Percentage participation requirement (also called co-pay or, incorrectly, coinsurance). Holds you to a set percentage of the payment in a loss.
What if you have 2 policies covering the same property?