Higher Deductible =Lower Premiums

Q – What is the relationship between my deductible on my homeowners’ policy and the premium I pay?  Will selecting a higher deductible reduce the premium? – S.L.

A – You bet it will!  While the relationship may not be exact, there is certainly money to be saved on your premiums by electing to assume more of the risk yourself, which is what you are doing when you opt for a higher premium.  Let’s look at a quick example.  The deductible is the part of a claim that you must pay first before the insurance company will pay anything.  So, if you have a $1,000 loss (known as an “insurable loss”) from your home due to damage or theft, and you have a $250 deductible in your homeowners’ policy, you will pay the first $250 of the loss, and the insurer will pay the remainder, or $750.

There are several reasons why premiums will be lower if deductibles are higher. First, there is the incentive effect.  You, the insured, are more “on the hook” in the event of a loss, so, in theory, you will try harder to avoid damages and losses.  Second, since you pay a larger share of the damages or lo, the insurer will not pay as much on your claim. 

These first two issues are reasonably obvious, but the third reason may not be. As there is a fixed administrative cost for settling a claim, and that cost is essentially unrelated to the claim size, the insurer would prefer to avoid many small claims, and will charge you a higher premium on a low deductible policy in order to encourage you to deal with small losses yourself. 

Don=t underestimate the incentive value of a high deductible policy. You will indeed be more vigilant about reducing or avoiding risks. You have a greater incentive to do so because of that larger deductible. So you may, for example, install smoke detectors, fire extinguishers, and a security system in your home. You won’t overload electrical outlets. You’ll be more careful about hooking up your gas BBQ in the spring, and storing the gas cylinder during the winter. 

And while we’ve used the homeowners’ policy to illustrate this concept, the same thinking applies to your auto policy as well.  The same benefits accrue to both you and your insurer from a carefully considered selection of your deductible level. – G.P.N.