A deductible is a standard policy provision that requires the insured to pay part of the loss. A deductible is a provision by which a specified amount is subtracted from the total loss payment that otherwise would be payable.
Deductibles are typically found in property, health, and auto insurance contracts. However, a deductible is not used in life insurance because the insured’s death is always a total loss, and a deductible would reduce the face amount of insurance. Also, a deductible generally is not used in personal liability insurance because the insurer must provide a legal defense, even for a small claim.
Purposes of Deductibles
Deductibles have several important purposes. They include the following:
- To eliminate small claims.
- To reduce premiums.
- To reduce moral and morale hazards.
Deductible in Property Insurance
The following deductibles are commonly found in property insurance contracts:
Straight Deductible
With a straight deductible, the insured must pay a certain amount of loss before the insurer is required to make a payment. For example, Mr. A has collision insurance on his new car with a Rs 5,000 deductible. However, if a collision loss is Rs 25,000, he will receive only Rs 20,000 after paying Rs 5,000 from his pocket.
Aggregate Deductible
Commercial insurance contracts sometimes contain an aggregate deductible. An aggregate deductible means that all losses during a specified period, usually a policy year or the first six months, are accumulated to satisfy the deductible amount. Once a deductible is met, the insurer pays the excess deductible.
For example, assume that the policy contains an aggregate deductible of Rs 10,000. Also, consider that losses of Rs 1,000 and Rs 2,000 occur during the policy year. The insurer pays nothing because the deductible is not met. However, if the third loss of Rs 8,000 occurs during the same period, the insurer would spend Rs 1,000. Any other losses arising during the policy year would be paid in full.
Deductibles in Health insurance
In health insurance, the deductible can be stated in terms of amount or time. Deductibles in health insurance include the following:
Compulsory Deductible
This is a mandatory deductible that the insurance company governs. Every time the policyholder raises a claim, this compulsory deductible has to be borne by the insured. For example, if the mandatory deductible is Rs. 10,000 and the hospitalization bill is Rs. 100,000, then the insured or the policyholder has to pay Rs. Then he, the insurance company, will pay 10,000 and the remaining. The compulsory deductible could also be in the form of a percentage of the sum insured.
Voluntary Deductible
A voluntary deductible is when the insured person can choose the deductible amount themselves. So, if you opt for this type of deductible, you will be able to select an insurance deductible amount that you can afford and are comfortable with. The decision could be made according to your income capacity and insurance needs. It is important to note that the higher the deductible amount, the lower your premium could be. For example, if you have opted for a voluntary deductible of Rs. 50,000 and raise a claim for medical expenses of Rs. 1 Lakh, then y, you have to pay Rs. The insurer would pay 50, 000 and the rest Health insurance companies choose different deductible amounts, say Rs 10,000 or Rs 50,000, and even higher deductible amounts. The higher the deductible lower would be the insurance premium. Often selecting a higher deductible amount make insurance available that otherwise wouldn’t have been possible, e.g., for persons suffering from existing diseases and above a particular age group.
Cumulative Deductible
This type of deductible is available exclusively for family floater policies, wherein the insurer applies the deductibles to each family member based on the chosen policy. All the other terms are similar to different deductibles, wherein the insured has to pay for the entire deductible, and the insurance company will pay the balance of the claim.
Calendar Year Deductible
A calendar year deductible is an aggregate deductible found in basic medical expenses and significant medical insurance contracts. Eligible medical expenses are accumulated during the calendar year, and once they exceed the deductible amount, the insurer pays the benefits promised under the insurance contract. Once the deductible is satisfied during the calendar year, no additional deductibles are imposed on the insured.
Waiting Period Deductible
A deductible can also be expressed as an elimination period. An eliminating waiting period is a stated period at the beginning of a loss during which no insurance benefits are paid.
Bottomline: Deductibles Reduce Insurance Premiums
Various factors will affect the cost of your insurance plan, including your age, where you are from and where you live, and the deductible amount you choose to include in your policy.
A higher deductible will lower your premium. As you agree to pay more out of your pocket for potential medical expenses, the cost to the insurer is reduced, and they share some of that benefit with you when you purchase the plan. Each insurer will handle deductibles and premiums differently. Often higher the deductible amount, the lower the insurance premium.
Suppose you choose Rs 10,000 deductible in a Rs 10 Lakh health insurance policy. Your premium depends on factors like age, existing health condition, and the number of family members insured, which come s Rs 20,000/- per year. Whereas, if you choose a deductible amount of Rs 50,000/-, the insurance premium may drop significantly to Rs 15,000/-. Some insurers offer health insurance policies with deductibles only part, particularly those in the age group of 45 years and above.
This is because the insured has agreed to bear an initial significant amount of medical expenses and thus reduced the cost of reimbursement or payment by the health insured company. This also reduces the risk of false or fabricated health insurance claims.
