Why do insurance companies require deductibles to be paid in the case of a claim like having all tires stolen from your car?
#InsuranceDeductibles #ClaimProcess #UnderstandingCosts
Understanding Insurance Deductibles
What is the Purpose of a Deductible?
– The purpose of a deductible is to share the cost of an insurance claim between the policyholder and the insurance company.
– Insurance companies require a deductible to ensure that policyholders have some financial responsibility in the event of a claim.
How Does it Work?
– When a claim is filed, the policyholder must pay the predetermined deductible amount before the insurance company covers the rest of the claim.
– Deductibles help prevent small or frequent claims, which can lead to higher premiums for everyone.
The Scenario
– Imagine you pay X amount per month for car insurance and have all 4 tires stolen from your vehicle.
– After submitting a claim, you are required to pay a hefty deductible for the damages.
By understanding how deductibles work, you can make informed decisions about your insurance coverage and claims process.
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.
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.
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.
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.
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.
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.
A few reasons:
1) You don’t get a friend to steal your tires since the new tires cost you something.
2) More incentive to avoid claims since the cost you $.
3) Avoids the hassle of dealing with small claims
In exchange for agreeing to be barred from submitting petty claims for ‘one broken tail-light lens, no other damage’ and similar, you get a slightly lower premium….
The lower the value of claim you want them to cover, the more you have to pay.
it’s to incentivize you to pay out of pocket for less expensive stuff. if someone does $200 of damage to your car and your deductible is $500, there’s no point in getting the insurance company involved. prevents them from having to deal with as many small claims, bigger deductibles also lower your premium a bit, so they’ll cover less stuff but it costs you less money.
Everybody here is being very helpful, but the actual answer is it’s one more way for insurance companies to make money from you, while reducing the amount of money they need to spend.
If you have to pay a deductible, you’re less likely to file a claim, especially if you have a deductible to meet for every claim you file. If you do file a claim, then the insurance company has to pay out the amount of the claim, minus whatever you’ve already paid.
It’s nothing more than another grift from an already fraudulent industry.