Plain Money Notes

Short, plain-English notes on insurance and personal finance.

The deductible break-even: is a higher deductible worth the savings?

Raising your insurance deductible lowers your premium. That's the whole trade. The question is whether the yearly savings add up to more than the extra risk you're taking on.

The simple test

Divide the extra amount you'd pay in a claim by the yearly premium savings. The answer is how many claim-free years it takes to come out ahead.

Hypothetical: moving a deductible from $500 to $1,000 saves $150 a year on premium.

If you go more than about three years between claims, the higher deductible wins. If you file a claim every year or two, it doesn't.

Most people claim less often than they think

For home insurance especially, many households go years between claims. Small claims also have a downside of their own: they can raise future premiums or count against you at renewal. That makes a higher deductible look better, since you weren't going to file small claims anyway.

The real limit: cash on hand

The math only works if you can actually pay the deductible on a bad day without borrowing. A $2,500 deductible that would go on a credit card at 24% isn't really saving you anything. Match the deductible to your emergency fund, not your hopes.

Watch for percentage deductibles

Some home policies, mostly in hurricane and earthquake areas, have deductibles set as a percentage of the dwelling limit rather than a flat dollar amount. A 2% wind deductible on a $400,000 dwelling limit is $8,000. Know which kind you have before a storm, not after.

Health insurance works a little differently

With health plans, the trade is often between a lower premium with a higher deductible and out-of-pocket maximum, versus the reverse. The best way to compare is total yearly cost under a few scenarios: a healthy year, an average year, and a worst case. This guide walks through exactly that: comparing total health plan costs.

For home and auto deductibles, including the percentage kind, the full guide is here: how to choose a deductible.

Hypothetical example. General information only, not insurance advice.