An insurance deductible is the amount you pay out of pocket before your insurance coverage begins paying. If your deductible is $1,000 and you have a $5,000 claim, you pay $1,000 and your insurer pays $4,000. Higher deductibles mean lower premiums.
How Deductibles Work — A Simple Example
When you file an insurance claim, your deductible is the portion you pay first out of your own pocket. The insurance company pays the remainder up to your policy limits. Example: Your car sustains $8,000 in collision damage. Your deductible is $1,000. You pay $1,000. Your insurer pays $7,000. If your car has only $600 in damage and your deductible is $1,000, filing a claim makes no financial sense since the damage is below your deductible.
How Your Deductible Affects Your Premium
Higher deductibles result in lower premiums because you are assuming more financial risk yourself. Moving from a $500 to a $1,000 deductible typically reduces your auto insurance premium by 15–20 percent. Moving from $1,000 to $2,500 saves an additional 10–15 percent. Choose a deductible you could comfortably pay from savings if needed tomorrow — choosing a $2,500 deductible when you only have $800 in savings creates a dangerous coverage gap.
When to File a Claim vs Pay Out of Pocket
After a minor incident, calculate whether filing a claim is worth the potential rate increase. If damage costs $1,800 and your deductible is $1,000, the net insurance payout is only $800. If filing causes your premium to increase by $500 per year for 3 years, you pay $1,500 more in additional premiums than you received from the claim. In this case paying $1,800 out of pocket and not filing is better financially. However, always file a claim if injuries are involved regardless of property damage cost.
Deductibles in Different Types of Insurance
Auto insurance deductibles apply separately to collision and comprehensive coverage — you can have a $500 collision deductible and $250 comprehensive deductible. Home insurance deductibles often include separate wind and hail deductibles in storm-prone states, expressed as a percentage of insured value. Health insurance deductibles reset annually at the plan year start date and typically range from $1,500 to $7,000 for individual coverage.