When terms like premium and deductible come up in a policy conversation, it helps to know how they work together. A little knowledge can help you make choices that fit your budget and provide the coverage you need when you need it.
What is a Deductible?
A deductible is the amount you agree to pay toward a covered loss before your insurance company’s payment applies. For example, if your vehicle has $5,000 in covered hail damage and your comprehensive deductible is $500, you would pay $500 and your insurance company would pay the remaining covered amount (in this example, $4,500).
Most policies include a deductible, and auto policies often have separate deductibles for collision and comprehensive losses, such as theft or hail. Deductibles are usually set as a flat dollar amount and may range from a few hundred dollars to $1,000 or more. Lower deductibles may be available in some situations, but they are less common today because repair and replacement costs have gone up.
What is a Premium?
A premium is the amount you pay for insurance coverage. In general, the more coverage you have, the higher your premium may be. Premiums are based on the likelihood of a claim, so things like your driving record, age, vehicle, location, whether your car is garaged at home and coverage choices can all play a role.
Here’s one way to think about it: two drivers may be the same age, drive the same type of vehicle and have similar credit. If one has a DUI and the other has a clean driving record, the driver with the DUI would likely pay a higher premium because the insurance company may view that driver as a higher risk.
Homeowners insurance works in a similar way. Location can affect rates, especially if a home is in an area with a higher risk of wildfires, storms or other natural disasters. Pools, trampolines or wood-burning stoves may also increase the chance of a claim. Your agent can walk through these details with you and look for ways to help reduce risk.
Choosing the Right Deductible
The deductible you choose can affect your premium. Usually, selecting a higher deductible can lower your insurance rate, while choosing a lower deductible may increase your rate. That tradeoff can be helpful, but it only makes sense if you are comfortable paying the deductible if a covered loss happens.
The main reason to purchase insurance is to help protect you and your family from the financial impact of a major loss. If you are willing and able to pay for smaller losses yourself, choosing a higher deductible could lead to premium savings. Just make sure it is an amount you could realistically afford on short notice.
Before choosing or changing a deductible, take time to compare your options and talk with your insurance agent. Together, you can find a balance between monthly costs and the protection you want in place if a covered loss occurs.
