Deductible in Insurance: A Complete Guide

At some point, anyone who has insurance has come across this term. And it is natural to sometimes gloss over insurance jargon. But we'll nip it in the bud by understanding everything about deductibles in insurance, so that you can secure your assets and health confidently.

A deductible plays a vital role in general insurance. It determines how much a policyholder has to pay before their insurance coverage kicks in. It can impact both your premiums and claims.

In this guide, we will understand the deductible component in insurance, explain how it works, and provide examples to help you choose the right deductible amount for your policy. Understanding this term can lead to more informed decisions when it comes to your insurance needs.

What Is a Deductible in Insurance?

A deductible in insurance is the amount you pay upfront before your insurer begins to cover the rest of a claim. It is a form of cost-sharing between the insurer and the insured. When a claim is made, the deductible is subtracted from the total amount of the expenditure, and the insurer will cover the remaining amount.

This arrangement directly impacts the claim settlement process. It reduces the insurer's risk and keeps premiums low. Essentially, the higher the deductible, the lower the premium, but the policyholder assumes more responsibility for the initial costs of a claim, which ultimately reduces the financial risk for the insurance provider. 

Types of Deductibles in Insurance

There are a few common types of deductibles in insurance, and each one is applied differently depending on the policy.

1. Per Claim Deductible 

This is the amount (or percentage, as per policy terms) you pay every time you make a claim, before the insurer covers the remaining amount. 
For example, if your car repair bill is ₹20,000 and your policy has a ₹5,000 deductible, you pay ₹5,000 and the insurer pays the remaining ₹15,000.

2. Annual Deductible 

An annual deductible is applied once in a policy year, and is common in health insurance plans. You must first pay a fixed amount out of pocket before the insurer starts sharing the costs.

For instance, if your health insurance has a ₹10,000 annual deductible, you will need to pay the first ₹10,000 of medical expenses in that year. After that, the insurer begins covering eligible expenses as per the policy terms.

3. Copay 

While not technically a deductible, a copay works in a similar way. It means the insurer and the insured share a percentage of every claim. 
For example, if your policy includes a 20% copay and your hospital bill is ₹50,000, you would pay ₹10,000 (20%) and the insurer would cover the remaining ₹40,000. 

How Do Deductibles Work in Insurance?

When a deductible applies to a claim, it affects how much you pay versus how much your insurer covers. Let's break down the concept of deductible in insurance with examples:

Claim Amount Lower than the Deductible

You have a claim of ₹3,000, but your deductible is ₹5,000.

No part of the claim is paid by the insurer because the deductible is higher than the claim amount. You will have to bear the entire ₹3,000 yourself.

Claim Amount Equal to the Deductible

Your claim amount is ₹5,000, and your deductible is also ₹5,000.

In this case, the insurer will not pay anything, as the deductible matches the total claim. You will be responsible for the full ₹5,000.

Claim Amount Higher than the Deductible

You have a claim of ₹15,000 and a ₹5,000 deductible.

You will pay ₹5,000, and the insurer will cover the remaining ₹10,000.

The key takeaway is that the deductible reduces the amount the insurer has to pay. By setting a deductible, you share a portion of the cost, which ultimately influences your insurance premium.

How to Choose the Right Deductible for Your Insurance Policy?

Choosing the right deductible depends on your personal financial situation and preferences. Here are some factors to consider:

1. Income stability: If you have a stable income, you may be comfortable opting for a higher deductible, as you can afford to pay more out-of-pocket if a claim arises. 
2. Emergency savings: Ensure you have sufficient emergency savings to cover the deductible amount in case of unexpected expenses, and make sure that your policy provides an adequate sum insured. If your savings are limited, you may want a lower deductible to avoid financial strain. 
3. Claim frequency: Consider how often you expect to file claims. If you rarely make claims, a larger deductible could save you money on premiums. However, if you anticipate frequent claims in general insurance policies like auto insurance, a lower deductible may be more manageable. 
4. Risk tolerance: Assess your comfort with paying out-of-pocket costs. If you're risk-averse and prefer predictability, a lower deductible could reduce potential financial stress. 

By evaluating these factors, you can choose a deductible that aligns with your financial goals and risk tolerance. You also need to consider the deductible if you are opting for health-related riders in some life insurance plans. You can increase the deductible amount and save on premiums in life insurance.

When Does a Higher Deductible Make Sense?

A higher deductible amount in insurance makes sense if you can comfortably afford the out-of-pocket cost in the event of a claim and want to reduce your premium. This is ideal if you have sufficient emergency savings and expect few claims. A higher deductible works well for those with stable income, who are financially prepared for unexpected expenses.

However, a higher deductible should be avoided if you have limited savings or expect frequent claims. In such cases, the financial burden of a high deductible could outweigh the premium savings, leading to unnecessary stress.

Conclusion

Deductibles significantly impact both your premiums and claims. A higher deductible generally lowers your premium, but it also means you'll have to pay more out of your pocket when making a claim. This choice should align with your financial preparedness and risk tolerance, rather than being driven solely by cost-saving goals.

It is essential to balance immediate savings with potential future expenses. To make sure you're getting the best coverage for your needs, explore the wide range of life insurance plans available at Bandhan Life.

Frequently Asked Questions

1. What is the difference between premium and deductible? 

The premium is the amount you pay regularly for your insurance policy to keep it active, while the deductible is the amount you pay out-of-pocket before the insurer steps in to cover the expenses. A higher premium often results in a lower deductible, and vice versa.

2. Are high deductibles always better? 

Not necessarily. While high deductibles lower your premium, they also increase the amount you pay out-of-pocket in case of a claim. A higher deductible may be suitable if you have enough savings and expect few claims, but it could cause financial strain if you frequently need to file claims.