Understanding Premiums and Deductibles

Insurers will require clients to pay premium for a policy or a combination of policies. Usually these premiums are set with a combination of several factors. People often complain that premiums differ even within the same policies but are usually not well informed on why this works. Although there are other factors to consider, like earlier mentioned, our attention is on deductibles.

In simple terms; higher deductible equals lower premium rate. Before getting all excited, let's simply understand what a deductible actually means. Deductible is the amount in damage or loss that you're willing to pay by yourself. To help simplify it, let's use an example.

Your home was engulfed in fire and the damages are minimal and repairs amount to about $1,000. If you are expecting your insurance company to bear this cost, then expect to have a high premium. If you set your deductible to say, something like $5,000, this means you'll bear the cost. Any damage or loss to or in your home below $5,000 will be undertaken by you. This automatically would mean a reduced premium.

So for someone with deductible placed at $10,000, the premium on the policy will be lower than someone on the same policy with deductible placed at $2,000. To be fair, insurance companies do not exist to take care of these minor expenses. It's best you leave them to take care of the bigger damages or losses.