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A deductible must be met for most insurance policies before insurance takes effect to cover the cost of whatever is insured.

A deductible is an amount of money that a person pays before the company provides the benefits described in an insurance policy. Payments are helpful in keeping the cost of insurance low. The amount varies, with lower deductibles generally associated with higher premiums. They are pretty standard across most types of policies, especially those related to automotive or health coverage.

Purpose

The main purpose of a deductible is to prevent people from making claims when the cost associated with a loss, damage or necessity is quite small. This leaves the company with more time and financial resources to deal with more expensive claims. These rates also make insurance more affordable because when the policyholder shares some of the claim costs, the issuer does not have to charge unreasonably high premiums. They also allow consumers to manipulate policy costs, allowing them to obtain coverage without major financial difficulties.

How it works

When a person needs to file a claim, he or she first “fulfills” (pays in full) the deductible. The insured, therefore, must invest part of his own money to cover his loss, damage or necessity. The company then covers the remainder of your costs up to the limits outlined in the policy.

For example, if a policyholder was involved in a car accident resulting in damages worth $1,000 US Dollars (USD) and had a $500 deductible, he would first pay $500 to the repair shop. The insurer would bear the rest of the costs. Even though the car owner still has to pay a portion of the repair bill, his total expense is cut in half because his payment qualifies him for some coverage.

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It is important to note that some policies have exceptions. A health insurance policy, for example, may cover the cost of an emergency room visit even if the policyholder does not meet his deductible. Exceptions are always clearly defined in the policy.

Quantities

The amount a person pays before their insurance coverage takes effect depends on the type of policy they have and the company they work with. In many cases, it relates to the cost of premiums that an individual regularly pays to maintain the policy. When a person opts for a low deductible, the issuer usually demands higher premiums because the amount is more likely to be met, forcing the company to pay for the policy. If an individual chooses a high amount, the issuer will likely demand a lower premium because the customer will have to pay more out of pocket before the insurer becomes liable for coverage.

Selecting a low amount may be good for some policyholders because if something goes wrong and claims are needed, they don’t have to deposit a lot of their own money before the issuer makes a payment. On the other hand, the higher premiums required can go to waste if the customer never needs to file a claim. For this reason, some experts recommend that healthy individuals or individuals with a low-claims history choose to pay more.

When a customer opts for a higher out-of-pocket expense, the lower premiums can reduce any immediate financial outlay. More money can go into other areas of the person’s budget. The risk here is that if the policyholder assumes they won’t need to claim, they may not set aside enough money to cover the high deductible. If something goes wrong, having to pay that much might not be possible without investing in savings or other funds.

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Calculation

More commonly, insurers calculate deductibles on an annual or per-incident basis. This means that value does not necessarily “accumulate” or extend over the life of a policy. In some cases, the deductible must be met for all car accidents, even if they occur in the same year. Health insurance deductibles usually reset at the beginning of the year. It’s a good idea for customers to calculate how much it will cost to pay several times over the course of the policy to determine if the rates are really affordable.

Application and regulation of the policy

Insurers can require these direct payments on virtually any type of policy. They are fairly standard, however, in automotive and health policy, and their similarity has led to industry and legislative regulations designed to protect the consumer in many places. Not all policies include deductibles, however many health maintenance organizations (HMOs) do not use them.

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