What Is the Difference Between Fixed and Percentage Deductibles?

When it comes to insurance policies, understanding the type of deductible you have is crucial. Deductibles are the amount you pay out-of-pocket before your insurance kicks in. However, while this may seem like a simple concept, your payments may be calculated in various ways. Two common types are fixed deductibles and percentage deductibles, each with distinct characteristics and implications.

Fixed Deductibles

A fixed deductible is a set amount you pay before your insurance covers the rest. For example, if you have a $500 fixed deductible on your auto insurance and you get into an accident causing $2,000 in covered losses, you’d be responsible for paying the first $500 with your insurance potentially covering the remaining $1,500. Fixed deductibles are generally straightforward and predictable, often making it easier for policyholders to budget for potential expenses.

Percentage Deductibles

Percentage deductibles, on the other hand, are calculated as a percentage of the insured value or the total claim amount. For instance, if your home is insured for $200,000 and you have a 2% deductible, you would pay $4,000 out-of-pocket for a total loss before your insurance possibly covers the rest. Since percentage deductibles are based on the value of the house you will find your dollar deductibles exposure increase every year. Percentage deductibles may lower your premium costs; however, they can also lead to higher out-of-pocket expenses, especially for high-value properties or significant claims.

Which Type of Insurance Deductible Is Right for Me?

The primary difference between fixed and percentage deductibles is their calculation and predictability. Fixed deductibles offer consistency and ease of budgeting, as the amount remains unchanged regardless of the claim size. Percentage deductibles, while potentially lowering premiums, introduce variability and can result in substantial out-of-pocket costs in the event of a large claim.

Choosing between a fixed and a percentage deductible can depend on your unique circumstances, including your financial situation, the value of the insured property and your risk tolerance. Understanding these differences can help you make an informed decision and ensure you are adequately prepared for any potential claims.

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This blog is intended for informational and educational use only. It is not exhaustive and should not be construed as legal advice. Please contact your insurance professional for further information.