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Understand the Relationship Between Insurance Premiums and Deductibles

Understand the Relationship Between Insurance Premiums and Deductibles

It’s no secret that insurance terminology can be confusing. You don’t need to know it all — that’s why you work with industry experts to make sure you have the right coverage — but it’s helpful if you understand at least a few key things.

Two particularly important concepts are your premium and your deductible. Read on for the lowdown of what they are, how they affect each other, and how to pick the best ones for you.

What is an insurance premium?

Your insurance premium is the regular payment you make (usually at a monthly interval) to have your insurance policy. It’s essentially the cost of your insurance, or what you’re paying to have access to a pool of resources if something goes wrong.

Your insurance premium rate depends on several factors, including:

  • Demographic information
  • Type of policy
  • Likelihood that you’ll need to file a claim

For example, you can take a look at how insurance carriers might determine your auto insurance rates here.

What is an insurance deductible?

Your insurance deductible is a preset amount that you have to pay before your insurance company will help you cover any losses. It starts over at the beginning of each year or policy term.

You can think of your deductible as the maximum amount you’ll ever have to pay so long as you keep your policy. If you experience damage above your deductible, your insurance will take care of it for you!

For example, if your deductible is $2,000 and a storm rages through your neighborhood resulting in $40,000 of home damage, you’ll only be responsible for that $2,000.

How do insurance premiums affect insurance deductibles?

Your insurance premium and deductible have an inverse relationship. As one increases, the other decreases — so a policy with a lower monthly premium will typically have a higher deductible, and a policy with a lower deductible will typically have a higher premium.

It’s a good idea to explore your premium and deductible options to choose the cost framework that works best for your unique circumstances.

Read on for a few tips — and don’t hesitate to reach out to your local agent if you have any questions!

When does having a high premium make sense?

As a general rule, it’s a good idea to have a higher premium and a lower deductible if you expect that you’ll use your insurance often — or if you would be unable to cover a large out-of-pocket expense at any given moment.

Here are some situations where this might be the case:

  • You are at high risk of needing to file a claim due to your lifestyle habits or locations
  • You aren’t able to save very much to prepare an emergency fund
  • You prefer to minimize unexpected costs and plan your budget ahead of time

When does having a high deductible make sense?

A high deductible could be the right choice for you if you don’t think you’ll have to file a claim very frequently. This way you’ll have a lower premium — meaning more money to save or spend each month — without the added worry of what you’ll do if something goes wrong.

Here are some situations where a high deductible makes sense:

  • Your lifestyle habits and locations put you at a low risk of filing a claim
  • You have an emergency savings fund in case you do need to use your insurance
  • You want to save or invest as much of your monthly income as possible

Reach out to your agent with any questions

If you still have a few questions about your insurance premiums and deductibles or want to talk through your options with someone who knows their stuff, don’t hesitate to get in touch with us! We’ll make sure every piece of your policy is right for you.

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