This is a guest article by Ryan Larkin. If you are interested in contributing to Debt RoundUp, please follow our guidelines.
As you may be aware, an insurance deductible is an upfront fee that you need to pay to the insurance company before you can claim and have them pay for the expenses covered by the insurance policy. For instance, if you have an auto insurance plan or a homeowner’s insurance coverage, you need to pay the deductible upfront for every claim you are staking. However, for a health insurance plan, the deductibles need to be paid on an annual basis.
Take this scenario for instance; you have insurance coverage by virtue of paying the necessary premium. However, you are forced to pay upfront for the insurance deductibles from your pocket when you make an insurance claim. However, what you tend to forget is that the deductibles help reduce the overall cost of insurance. If there were not insurance deductibles charged, the companies will be besieged with small claims that they would have to settle and will have no other go than to raise the premium rates to make up for this. This increased cost has to be invariably borne by the customer.
Is this the solution to saving money on insurance? Though this may appear to work well, because if the deductibles are increased, your premiums – the amount you pay at regular intervals, either monthly, quarterly, half-yearly, or annually will automatically get reduced. However, the very purpose of insurance, which is to help tide over an unforeseen crisis, seems to be defeated when you try to save money by increasing insurance deductibles. Let’s face it; you don’t opt for health or homeowners insurance just because you want to spend money or to save on tax. You do it because you can’t predict when you are going to need that money. Without insurance to bail us out, most of us will face financial ruin when confronted with unexpected calamities.
The answer is to have an emergency fund that you can draw upon, if you can manage to have such a fund, you could draw from that to raise the deductibles for your insurance and save money in the long run. However, why have to raise the deductibles at all, you may ask? You probably don’t need this if you have enough money stashed away. If you are really wealthy, you probably won’t have to have insurance cover at all except for the mandatory cover required by law.
Statistics show that an average homeowner has to make an insurance claim once in about 9 to 10 years. That being the case, you will certainly be saving more money if you increase your insurance deductibles. The chances are there for an unforeseen need for you to claim due to an unexpected fire that burnt down your home or some other such calamity. In such cases, your saving would have become meaningless. However, going by the principle of probabilities, it is most unlikely a thing to happen.
Hence, increasing deductibles on your insurance premium is probably the smartest move you can make as far as saving money is concerned. However, it is important to create the emergency fund, by forced savings or trying to earn extra money through some part time job, so that you have enough to pay towards the extra expenditure on increased deductibles.