Updated on October 4, 2023
Deductibles are a fundamental component of insurance policies, including health insurance, auto insurance, and property insurance. A deductible is essentially the amount of money that the policyholder must pay out of their own pocket before their insurance policy kicks in to cover a portion of the expenses. In other words, it’s the initial cost or financial responsibility that the insured person bears before the insurer starts reimbursing for covered losses or claims.
What are the types of Deductibles?
Insurance policies may offer different types of deductibles, such as:
Fixed Deductibles – Fixed deductibles involve a specified, unchanging amount that the policyholder must pay for each claim before the insurer steps in. For instance, a health insurance policy might have a fixed deductible of Rs.2,000 for all claims.
Percentage Deductibles – Some insurance policies, especially health insurance, may have deductibles calculated as a percentage of the claim amount rather than a fixed sum. For example, if your health insurance policy has a 10% deductible and the medical bill is Rs. 20,000, you’d pay Rs. 2,000 (10% of Rs. 20,000), and the insurer would cover the remaining Rs. 18,000.
What is the core purpose of deductibles?
Deductibles serve several important purposes in insurance. These are highlighted here.
Risk Sharing – Deductibles encourage policyholders to share in the financial responsibility for small or routine expenses. This helps prevent policyholders from making frequent small claims, which could drive up insurance premiums for everyone.
Cost Control – By requiring policyholders to cover a portion of the costs, deductibles help insurers manage claims expenses and reduce the likelihood of moral hazard (the tendency to be less cautious when insured).
Affordability – Insurance policies with deductibles often have lower premiums because policyholders bear some of the initial costs. This makes insurance more affordable for individuals and families.