Deductible (Property & Casualty)
A deductible is the amount the insured must pay out-of-pocket before insurance coverage begins, representing a form of self-insurance that reduces premiums.
Exam Tip
Higher deductible = lower premium. Percentage deductibles common for catastrophic perils (hurricane, earthquake).
What is a Deductible?
A deductible is the portion of a covered loss that the policyholder must pay before the insurance company pays its share. Higher deductibles mean lower premiums because the insured assumes more of the risk.
How Deductibles Work
| Scenario | Amount |
|---|---|
| Total Loss | $5,000 |
| Deductible | $1,000 |
| Insurance Pays | $4,000 |
| You Pay | $1,000 |
Types of Deductibles
| Type | Description |
|---|---|
| Flat Dollar | Fixed amount (e.g., $500, $1,000) |
| Percentage | % of coverage limit (common for wind/earthquake) |
| Split | Different deductibles for different perils |
| Disappearing | Reduces as loss increases |
Percentage Deductibles
Common for catastrophic perils:
- Hurricane: 2-5% of dwelling coverage
- Earthquake: 10-20% of dwelling coverage
- Wind/Hail: 1-5% of dwelling coverage
Deductible Strategy
| Higher Deductible | Lower Deductible |
|---|---|
| Lower premiums | Higher premiums |
| More out-of-pocket | Less out-of-pocket |
| Avoid small claims | Coverage for small losses |
| Better for infrequent claims | Better for frequent claims |
Study This Term In
Related Terms
Actual Cash Value (ACV)
Actual Cash Value is a property valuation method that equals replacement cost minus depreciation, representing what property is worth today after accounting for wear and tear.
Replacement Cost
Replacement cost is a property valuation method that pays the full cost to replace damaged property with new items of like kind and quality, without deducting for depreciation.
Coinsurance (Property Insurance)
Coinsurance is a property insurance provision requiring the insured to carry coverage equal to a specified percentage (usually 80%) of the property value or face a penalty at claim time.
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