Scenario: I pay X amount of dollars per month for car insurance. I have all 4 tires stolen from my vehicle overnight. I submit a claim with my insurance company to repair any damages. I now pay a **hefty** X amount of dollars for the event that has occurred.
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Deductibles put some of your skin in the game so it reduces what the insurance company pays so (in theory), it reduces your premiums.
More importantly in the real world, it prevents you from submitting tiny value claims. The overhead to the insurance company to process a claim is basically independent of the value of the claim…they do the same basic work to send a $10 paint chip touchup to the body shop as to send a complete repaint. If it literally cost you nothing to submit a claim a lot of people would submit *everything*…which drives the insurance companys’ costs way up. Deductibles prevent that. If you have a $500 deductible you’re not going to submit anything to the insurance company for values under $500…you handle the small/easy stuff yourself so they don’t have to.
it’s a cost splitting measure: if you assume more of the risk yourself, you can pay a lower premium. if you want the insurer to take more risk, you have to pay for that.
The entire point of a deductible is that you assume some of the risk/cost for claims in exchange for lower premium rates. You can look for zero-deductible coverage if you want. It just comes with a much higher premium.
Two main purposes:
* “Insurance” is meant to cover you for big expenses. Your car insurance doesn’t pay for your oil change, or for a car detailing if you spill your coffee driving. Having a deductible limits your insurance to covering big stuff, which is cheaper and means your insurance premium is much lower.
* It’s one extra reason to drive cautiously. You don’t want to have to pay your deductible, which means you’ll behave more responsibly, which means you’ll be less likely to have an insurance claim. I’m sorry your tires were stolen, that sucks. If you had new tires bought free of charge, you might be almost happy your tires were stolen. But instead, you likely are paying a $500 deductible, and you might consider parking somewhere safer next time, which makes your insurance company happy.
It helps to understand it if you look at insurance as gambling.
The premium you pay is how much money the company thinks you need to pay to make sure you pay them more money than they think they’ll have to pay you for claims.
Part of that is your “risk profile”. They try to figure out, statistically, how many big and small claims you will make. In theory, if some road debris chips some paint on your bumper you could submit that as a claim the same way you could a more damaging accident.
So they reckon the cost of all of those tiny paint chips adds up. If you want them to pay for those, you have to pay for a much lower deductible, which means your premium goes WAY up because now they’re including, “How likely do I think you’ll need dent repair and other small fixes?”
But if you pick a higher deductible, now you’re responsible for more and more of the repairs they’re predicting. If you’re responsible for more, you pay them less.
Does it balance? Not for most people, they’re in it to profit. But they also have to spread their risk analysis across everyone. Their stats tell them some people will cost WAY more than they pay, so part of your premium is covering those other peoples’ risk too. That may sound unfair, but insurance basically can’t work if people who don’t need it aren’t helping pay for the people who do. That’s part of why US healthcare doesn’t work, we try our best to let people avoid paying in if they don’t think they’ll get sick.
deductible is you telling your insurance “hey, I can afford any problems less than $500, anything more than that, I need help”
so when your tires get stolen, you pay the first $500 (since you told the insurance company you could afford that) and the insurance company pays the rest.
if the tires cost less than $500, then you’re on the hook for the entire amount and the insurance pays nothing.
You pay less per month because you are assuming a certain amount of liability. Say your deductible is $1000. You are paying for everything up until $1000 and then your insurance pays after that. Simply put, you are basically paying a premium to insure your car beyond $1000 in damages.
You can get insurance with no deductible, it will just cost you more per month and unless you frequently make claims the additional premium will eventually end up being more total than your premiums plus the rare out of pocket expense of your deductible.
Insurance is risk transfer. You pay a premium to transfer an amount of risk for particular things (example: Fire). It would be easier to think of a deductible as the amount of risk that you do not transfer (risk that is retained).
In regards to your current situation, the dollar amount of the deductible is one that you have chosen and agreed to. You could have had a lower one and it likely would not have been significantly more expensive.
I just wanted to add that there are many countries where the deductible doesn’t exist. Deductibles are mainly a thing in USA. A cynic in me is saying that it’s simply a money grab, similar to fees, tips, market-value dependent property tax and other things that are common in the US, but not so common in other places.
It keeps people from driving like psychos and then submitting 10 claims a year due to their own negligence. “Whoops, I slammed into another curb! I guess I’ll have to file another claim for the insurance company to pay out $7,000 worth of damage.”
You can pay a balance between premiums and deductibles. Like I have a $1,000 deductible instead of $500 so my monthly payments are lower. As you are willing to front more money, you’re going to drive more carefully.
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