At BrokerLink, we know that not everyone works in the insurance industry. That's why we avoid insurance lingo and speak in plain English. Unfortunately, there are two terms we can't avoid: premiums and deductibles. If you've ever had an insurance policy before, you're probably familiar with them. Despite this, there are often misconceptions about what these words actually mean. However, the important part is understanding how they affect your insurance policies.
That's why we're here to help! We've created a guide that explains deductibles and how they affect your premiums. The two have a special relationship when it comes to your insurance. Each plays an important role in your policy and makes an impact. Read on to learn more about what these important terms mean and how they impact your insurance policy.
Understanding insurance deductibles
So, what is an insurance deductible? A deductible is the amount of money you pay before being compensated for your insurance claim. As the policyholder, it's important to understand that you are partially financially responsible for paying before you receive compensation.
Why do you have an insurance deductible
Since you're paying for your insurance company to provide financial protection, you may wonder why deductibles exist at all. Isn't the point of having insurance to take the responsibility off of you in the event of a claim? The answer to this question is "yes," but there's so much more to things than a one-word answer.
The deductible amount exists because everyone involved in a claim has to take some responsibility. In other words, everyone should be behaving in a safe way to reduce risk. Since everyone has something to lose if something were to happen, everyone has to take responsibility for paying part of the damages in case a loss occurs.
Deductibles are around to keep insurance premiums lower. If deductibles didn't exist, people would file claims for small accidents. As a result, insurance companies would have to issue more payouts, increasing everyone's insurance rates.
How insurance deductibles work
So, how do insurance deductibles work? You already know insurance pays for the portion of the damages not covered by the deductible. However, there are two types you should know about:
Standard deductible
This is a specific dollar amount that you will be responsible for paying before receiving insurance coverage in the event of an accident.
Percentage deductible
In your insurance contract, you have a policy limit. When you have a percentage deductible, you pay a percentage of the damages rather than a specific dollar amount.
The minimum deductible will vary depending on your plan. Consult with your insurance company to know how much your insurer pays if you make a claim. The type of deductible you have can make a difference.
When you purchase an insurance policy, you should learn about your deductible right away. After all, it represents the portion of money you have to pay if an incident occurs. This can have a big impact on your financial situation. That's why you should review your contract with your insurance broker to ensure the deductible amount listed is something you can afford. Various types of insurance policies require a deductible. Next, we will compare and contrast auto and home insurance policies and their deductibles.
Types of deductibles for different insurance policies
Auto insurance and home insurance are very different in nature. However, when purchasing insurance, you should also remember the deductibles. They don't apply in every situation, which is why we're going to discuss when you have to pay a deductible for each of these claims. Below, we will review the types of deductibles for various insurance policies:
Auto insurance deductibles
You only have to pay your car insurance deductible when making a vehicle damage claim. For example, if someone damages your vehicle in a common car accident, you have your deductible amount to get insurance to cover the remaining repair costs. Liability claims, such as those associated with third-party liability coverage, do not require you to pay a deductible. This can be helpful as Toronto car insurance is often quite pricey.
Car insurance policies have a couple types of auto insurance policies, including those with optional coverage. For example, you have to select separate deductibles for collision and comprehensive coverage. Despite this, you can make them the same amount.
Home insurance deductibles
When it comes to home insurance, deductibles only come into play when there's property damage. Similar to car insurance, homeowners don't need to pay a deductible for liability claims.
However, unlike its counterpart, a home insurance deductible can come in two forms. There's either a standard deductible or a percentage deductible. Review your insurance policy to see which one applies to you.
It's not uncommon to have more than one type of insurance policy. Car insurance is legally required across Canada, and homeowners insurance isn't mandatory, but you may need it to get approved for a home loan. If you're ever unsure about minimum deductibles for your policy, reach out to an insurance professional from BrokerLink — we are here to help. However, deductibles aren't the only part of an insurance policy. Premiums also play a big role, which we will discuss in more detail shortly.
Defining insurance premiums
An insurance premium is how much the policyholder pays to receive coverage. It's the amount that you pay to your insurance company each month or year to maintain your policy. Before you commit to an insurer, you will receive insurance quotes that will let you know how much a policy will cost.
How insurance premiums are calculated
Now that you understand what an insurance premium is, you might wonder how your insurance company calculates your rates. When insurance companies are determining the costs of your insurance policy, they take your level of risk into account. Basically, your risk level is how likely you are to submit a claim. It's important to note that insurance companies across Canada are carefully regulated to ensure premiums are fair.
When it comes time to set your insurance rates, providers consider many factors. Here are some of the aspects that are notable for each type of insurance premium:
Car insurance
In the following section, we will discuss how car insurance premiums are calculated based on the following factors:
- Car make and model
- Year of manufacture
- Your driving history
- Where you live
Home insurance
In the upcoming section, we will explain how car insurance premiums are determined by considering the following factors:
- Where you live
- How big your home is
- How you use the property – is it your main residence or vacation home?
- How your home is heated
- How close you are to water and fire hazards
- The electrical and plumbing infrastructure in your home – is it up to date?
Business insurance
In the next section, we will outline how car insurance premiums are determined by taking the following factors into account:
- The type of business
- The type of equipment your business needs
- Where your business is located
Paying for insurance premiums
Most customers opt to pay their insurance premiums monthly. However, there is also the option of paying once per year. Depending on the insurance company you are dealing with, an annual payment could save you a bit of money. Speak with your insurance provider to find out what options are available to you.
Your insurance premium is how much your rates are each month. It's important to review how much they cost before committing to one insurance company. An experienced broker can help you shop around. Your rates are based on several factors, and there are ways to save money, a well-kept secret is a higher deductible leads to lower premiums. Why is that? We will learn more about the connection between deductibles and premiums in the next section.
The relationship between insurance deductibles and premiums
Your insurance premium and deductible directly connect with one another. Generally, increasing your deductible amount will lower your insurance premium. Why? This is because you will pay more out of pocket if you have to make an insurance claim. In other words, regardless of your insurance policy, your provider won't have to compensate you as much. The result is a lower insurance premium.
Let's state the obvious — increasing your deductible amount will lower your insurance bill. Yes, that's true, but stop and think for a moment before making any rash decisions. Your deductible amount is something you have to cover financially if you get into an accident. Take a look at your finances and speak with your insurance broker to find out a deductible amount you can afford. After all, your insurer covers the amount that isn't paid by your higher deductible.
In summary, a lower deductible leads to higher premiums and a higher deductible leads to lower premiums. However, whether or not you want to take the risk of paying a decent amount out of pocket is ultimately up to you. It can save you money in the short term, but if you get into an accident, you will pay for it later. Do you want to learn more about the relationship between insurance deductibles and premiums? Check out our guide to insurance premiums and deductibles.
Consult with BrokerLink today
It's nice to have covered expenses if you get into an accident. That's where having multiple deductibles can come in handy. Despite this, you should note that deductibles are non-refundable, and you have to pay them if certain incidents do occur. Hopefully, we have given you a better understanding of deductibles, how they work and their connection to your insurance premiums. If you ever need help, a broker is always the best choice.
Whether you have home or auto insurance policies, deductibles make a difference if you ever have to make a claim. This is especially true when considering how much car insurance is per month in Ontario. If you're still unsure if a higher deductible is right for you, reach out to an insurance broker. A broker will be able to answer all your questions and help everything make sense. You don't need to be the expert — leave that to your BrokerLink broker. We know all the ins and outs of insurance and how deductibles work. You don't have to do it alone! A BrokerLink advisor can assist you with the following:
- The type of business
- The type of equipment your business needs
- Where your business is located
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Deductible insurance meaning FAQs
When do I pay car insurance deductibles?
You only need to pay a car insurance deductible if you are making a claim. For example, if you get into a car accident and there is $2,000, what happens? If your deductible is $500, you will pay that amount. Insurance covers the remaining $1,500.
What happens if I fail to pay my insurance premiums on time?
If you don't pay your insurance premiums on time, your insurance policy may get cancelled. If you are experiencing financial hardship and don't think you'll be able to pay your insurance premium on time, speak with your insurance broker right away. Your insurance broker will be sympathetic to your financial situation and may help you find an option to help you avoid cancellation. Don't wait until it's too late. If you don't pay for your coverage on time, your rates will increase in the future.
Why do insurance premiums change over time?
Insurance premiums vary based on many factors. Where you live, your driving experience and the type of car you drive affect your rates. As you gain more driving experience, you will pay less for car insurance. However, the opposite may be true if you move to a new city or neighbourhood. These changes can sometimes be frustrating, but understanding why they happen can help you deal with an adjustment. Reach out to your insurance broker if you have any questions.
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