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Risk and Reward: Is a High Deductible Insurance Policy Right for You?

By Andrew Denton. Last updated 02/26/2024.

When unexpected events occur, insurance offers financial protection and peace of mind. As you choose your insurance coverage, you’ll face a crucial decision: whether or not to opt for a high deductible. 

First, let’s define what a deductible is. If you file a claim with your insurance company, it’s the amount of money that you, as the policyholder, must pay out-of-pocket before your insurance coverage starts paying for a covered loss. This is a common feature in many types of insurance policies, such as health, auto, and homeowners insurance. For example, if your auto insurance policy has a $500 deductible and you get into an accident that causes $2,000 in damage to your car, you would pay the first $500. Your insurance company would pay the remaining $1,500. Deductibles can vary in amount and are usually chosen by the policyholder when purchasing the insurance.

Though you are assuming more financial risk on the back end of a potential accident, it’s important to understand the pros and cons to help you make an informed decision. Yes, there actually are some advantages. 

The High Deductible Advantage:

Lower Premiums:

  • One of the key advantages of choosing a high deductible is that it typically comes with lower monthly premiums. You can reduce your ongoing insurance expenses by agreeing to pay a higher amount out of pocket before your insurance kicks in. This means more money in your pocket every month.

Savings Over Time:

  • Most insurance claims are related to events that are improbable or infrequent. You retain more control over your finances by opting for a high deductible. You will ultimately save money by keeping the funds that you would otherwise give to the insurance company for events that may never happen or may not result in a claim.

Risk Management:

  • A high deductible encourages personal responsibility and risk management. Knowing you have a significant deductible can motivate you to take preventive measures to reduce the likelihood of claims. For example, in the case of property insurance, you might invest in security measures that lower the risk of theft or damage.

The Considerations:

While a high deductible can offer several benefits, it’s important to consider the following factors:

Financial Preparedness:

  • Keeping a high deductible means you should have enough savings to cover that deductible in case of a claim. If you don’t have an emergency fund, a high deductible may not be the best option, as it could lead to financial strain in the event of an unexpected loss.

Personal Risk Tolerance:

  • Your willingness to take on a larger financial burden in exchange for lower premiums plays a significant role in this decision. Assess your comfort level with risk and evaluate whether a high deductible aligns with your financial goals and security needs.

Ultimately, choosing a high deductible in your insurance policy depends on your unique financial situation and risk tolerance. ValuePenguin states it nicely: “Choosing your deductible is about balancing your budget and the amount of risk you can tolerate.” If you can maintain an emergency savings fund to cover the deductible and are comfortable with the associated risk, then opting for a high deductible can be a wise choice. However, if you’re not financially prepared or prefer the security of lower out-of-pocket expenses, a lower deductible may be more suitable for your needs. The key is to strike a balance that aligns with your financial goals and priorities. Remember, insurance decisions should be based on your individual circumstances and what makes the most sense for your future-focused financial planning. It’s always a good idea to discuss this with your Green Brook Onboarding Advisor to make the best choice for your situation. You can schedule an appointment to do so here.