High vs. Low Insurance Deductibles: Pros and Cons
For many Kiwis, choosing the right insurance policy can be a daunting task. One of the key decisions you’ll face is selecting an appropriate deductible, also known as an excess in New Zealand. This choice can significantly impact both your premiums and out-of-pocket expenses when making a claim. In this article, we’ll explore the pros and cons of high and low insurance deductibles, helping you make an informed decision that suits your financial situation and risk tolerance.
Understanding Insurance Deductibles
Before diving into the pros and cons, it’s essential to understand what a deductible is. In the context of insurance, a deductible is the amount you agree to pay out-of-pocket before your insurance coverage kicks in. For example, if you have a car insurance policy with a $500 deductible and you make a claim for $3,000 in damages, you would pay the first $500, and your insurer would cover the remaining $2,500.
High Deductibles: Pros and Cons
Pros:
- Lower Premiums: One of the most significant advantages of choosing a high deductible is the reduction in your monthly or annual premiums. Insurance companies view high deductibles favourably because they reduce the likelihood of small claims, which are costly to process.
- Potential for Savings: If you’re a low-risk policyholder who rarely makes claims, a high deductible can lead to substantial savings over time through lower premiums.
- Encourages Responsible Behaviour: Knowing you’ll have to pay a larger amount out-of-pocket in the event of a claim can encourage more cautious behaviour, potentially reducing the likelihood of accidents or losses.
Cons:
- Higher Out-of-Pocket Costs: In the event of a claim, you’ll need to pay a larger amount before your insurance coverage begins. This can be financially challenging, especially if you’re not prepared for the expense.
- Multiple Claims Can Be Costly: If you experience multiple incidents in a short period, you may find yourself paying the high deductible multiple times, which can quickly add u.
- May Discourage Necessary Claims: The prospect of paying a high deductible might deter you from making legitimate claims, potentially leading to more significant problems down the line if issues are left unaddressed.
Low Deductibles: Pros and Cons
Pros:
- Lower Out-of-Pocket Costs: With a low deductible, you’ll pay less when making a claim, which can be particularly beneficial if you anticipate needing to use your insurance frequently.
- Peace of Mind: Knowing that you won’t have to pay a large sum in the event of a claim can provide greater peace of mind, especially if you have limited savings or cash flow.
- More Predictable Expenses: Lower deductibles make it easier to budget for potential insurance claims, as your out-of-pocket expenses are more limited and predictable.
Cons:
- Higher Premiums: The trade-off for a low deductible is higher monthly or annual premiums. Over time, this can add up to a significant amount, especially if you don’t make many claims.
- Potential for Overpaying: If you rarely make claims, you may end up paying more in premiums than you would save with a low deductible.
- May Encourage Smaller Claims: With a low deductible, you might be more inclined to make claims for minor incidents, which could potentially lead to increased premiums in the future.
Factors to Consider When Choosing Your Deductible
When deciding between a high or low deductible, consider the following factors:
- Financial Situation: Assess your ability to pay a higher deductible in the event of a claim. If you have a healthy emergency fund, a higher deductible might be manageable.
- Risk Tolerance: Consider your comfort level with financial risk. If the idea of a large out-of-pocket expense causes significant stress, a lower deductible might be preferable.
- Claim Frequency: Evaluate how often you’re likely to make claims. If you have a history of frequent claims or anticipate needing to use your insurance often, a lower deductible could be more cost-effective.
- Premium Savings: Calculate the difference in premiums between high and low deductible options. Sometimes, the savings might not be significant enough to justify the increased financial risk.
- Type of Insurance: The impact of deductibles can vary depending on the type of insurance. For example, the considerations for health insurance might differ from those for car or home insurance.
The New Zealand Context
In New Zealand, it’s important to note that some insurance policies, particularly in the health sector, operate differently from those in other countries. For instance, the public health system covers many medical expenses, which can influence your decision about private health insurance deductibles.
Additionally, natural disaster coverage, such as for earthquakes, often has separate deductible structures. The Earthquake Commission (EQC) provides natural disaster insurance to residential property owners, which is automatically included when you take out private house insurance. Be sure to understand how these specific policies work in conjunction with your private insurance when making decisions about deductibles.
Choosing between a high and low insurance deductible is a personal decision that depends on your individual circumstances, financial situation, and risk tolerance. While a high deductible can lead to significant premium savings, it also means taking on more financial risk in the event of a claim. Conversely, a low deductible offers more predictable out-of-pocket expenses but comes with higher ongoing costs.
Ultimately, the best choice is one that balances your need for coverage with your ability to manage potential out-of-pocket expenses. It’s always wise to review your insurance policies regularly and adjust your deductibles as your financial situation and needs change over time.
Remember, insurance is meant to provide peace of mind and financial protection. Whether you choose a high or low deductible, the most important thing is that you have adequate coverage to protect yourself and your assets. If you’re unsure about which option is best for you, consider consulting with a licensed insurance advisor who can provide personalised guidance based on your specific situation.