Deductible
Definition
The amount you must pay out of pocket for covered expenses before your insurance policy begins to pay. Higher deductibles typically result in lower premium costs.
A deductible is the initial portion of a covered loss that you're responsible for before insurance kicks in. If you have a $1,000 deductible on your auto insurance and get into an accident causing $5,000 in damage, you pay $1,000 and insurance covers the remaining $4,000.
Deductibles exist across all types of insurance — health, auto, homeowners, and renters. They serve two purposes: they reduce the number of small claims insurers must process, and they give policyholders a financial incentive to avoid unnecessary claims.
The deductible-premium tradeoff is a key financial decision. Choosing a higher deductible lowers your monthly premium but increases your out-of-pocket risk. A healthy person might choose a high-deductible health plan (HDHP) to save on premiums and pair it with an HSA for tax-advantaged medical savings.
For budgeting purposes, your total potential deductible exposure across all insurance policies represents an important emergency fund consideration. If your auto deductible is $1,000, health deductible is $3,000, and homeowners deductible is $2,500, you should have at least $6,500 accessible for potential claims.
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Related Terms
Frequently Asked Questions
Should I choose a high or low deductible?
Choose a higher deductible if you have an adequate emergency fund and rarely file claims — you'll save on premiums. Choose a lower deductible if you can't absorb a large unexpected expense or if you use your insurance frequently.
Does the deductible reset every year?
Health insurance deductibles reset annually (typically January 1). Auto and homeowners deductibles apply per claim, not per year — each new claim requires meeting the deductible again.