Insurance Premium vs. Deductible: Compare the Whole Cost

Separate the recurring bill from the cost of a loss

You pay premiums to keep coverage in force whether or not you file a claim. For many property and auto coverages, a deductible applies to a covered loss. Different parts of the same policy can have different deductibles or no deductible.

This guide uses property-style examples. Health insurance can involve annual deductibles, copayments, coinsurance, networks, and other rules; the examples below do not describe those arrangements.

Sources: NAIC: Why are my insurance premiums increasing? · NAIC: Comparing homeowners insurance policies

Put the premium savings beside the extra exposure

Suppose two otherwise identical annual policies cost $1,000 with a $500 deductible and $820 with a $1,500 deductible. Choosing the second saves $180 each year, while leaving you responsible for up to $1,000 more on a loss to which that deductible applies.

Dividing $1,000 by $180 gives about 5.6 years of premium savings. That is a simple comparison, not a prediction of when a claim will happen. A covered loss could occur tomorrow, and premiums or policy terms could change at renewal.

Sources: NAIC: Comparing homeowners insurance policies

Convert percentage deductibles into dollars

Some homeowners policies have separate deductibles for named storms or other specified events. A percentage deductible may be calculated from the insured dwelling value rather than from the damage bill. State rules and policy wording affect when it applies.

For an insured dwelling value of $350,000, a 2% deductible equals $7,000. It does not mean you pay only 2% of a $10,000 loss. Find the calculation base and the triggering event in the policy so you can estimate the amount correctly.

Sources: NAIC: What to know about named storm deductibles

Choose using money you could actually access

Before increasing a deductible, consider whether the higher amount would be available after a loss. The same event could also interrupt income or create expenses outside the policy. A lower annual bill is less helpful if the deductible would be unmanageable.

Compare quotes with the same coverage limits, insured people or property, and settlement terms. Check installment charges and discounts as well as the headline premium. Ask the insurer to explain each deductible using a concrete example of the event you are concerned about.

1. Match the coverage and limits across quotes.
2. Calculate the annual premium difference.
3. Convert every applicable deductible into dollars.
4. Check the available cash against the possible amount you would bear.

Sources: NAIC: Comparing homeowners insurance policies · NAIC: What to know about named storm deductibles