If you watch much television, it’s likely you’ve seen a variety of “vanishing insurance deductible” commercials aired by numerous property insurance companies. The idea behind a vanishing insurance deductibles is simple, and sounds attractive for consumers; for every year of “safe driving” (presumably, this means going a full calendar year without submitting any losses to the insurer), the insured’s deductible will decrease, and eventually “vanish” altogether once enough years of safe driving have been accumulated.
Are Vanishing Insurance Deductibles A Good Idea
However, before anyone starts contacting their insurance agents and demanding to make their deductibles disappear, it’s important to understand the multitude of financial responsibilities an insured must uphold after purchasing property insurance, and how they relate to one another.
For starters, there is of course the premium. A premium is a fee paid periodically (monthly, yearly, etc.) to an insurer in order to receive the benefits of an insurance policy. Almost every insurance policy one can think of requires premium payments from an insured, with only a few exceptions (more on this later).
Insurers also commonly impose coinsurance requirements on their policyholders. Coinsurance refers to a system in which the insurer agrees to pay a percentage of any loss according to an established ratio, leaving the insured on the hook for the remaining percentage. For example, if an “80/20” ratio is established, the insurer promises to cover 80% of the financial damages following a loss, and the insured pays the remaining 20%.
While coinsurance is more common in the health industry, property insurers typically want to forego utilizing such a system. Thus, property insurance policies often carry coinsurance clauses, which imposes a coinsurance ratio only in the event that a policyholder has not purchased enough coverage to insure an item of property at its full value. As long as an insured has enough coverage (typically 80% of the property’s value), the policy will disregard the coinsurance ratio and pay benefits in full.
Finally, as mentioned earlier, insurance policies often carry deductible requirements as well. A deductible is an additional financial obligation that an insured must meet when submitting every claim before benefits of an insurance policy can kick in. This is designed to limit the amount of claims an insured will submit, which in turn lowers an insurer’s operating costs.
For example, let’s say that an insured (we’ll call him Trevor) has an auto insurance policy with a $500 deductible. This means that following any loss, Trevor must first pay $500 out-of-pocket before his insurer will pay any benefits. A $500 deductible would thus discourage Trevor from submitting the claim if total damages are less than $500.
What does this have to do with vanishing insurance deductibles, you might ask? The answer may be clear already – each of the financial responsibilities of a policyholder within an insurance contract is related to one another. So as one decreases, another is likely to increase.
For example, an insurer might pledge to reduce or completely eliminate your deductible if you submit no claims, but the fine print is likely to reveal an above-average or increased premium. Conversely, a policy marketed with below-average premium amounts is likely to try and recoup that money by imposing high deductibles. An insurer could even manage to keep both deductibles and premiums low by getting creative with the coinsurance ratio, if it were so inclined.
For more information on the financial responsibilities of an insured, it would be helpful to contact an Independent Insurance Agent.
They are likely to agree that, if not properly understood, a vanishing insurance deductible can help the contents of your wallet vanish as well.