What Is a Deductible? And How Should You Choose One?

A deductible is the amount you pay out of pocket toward a covered insurance claim before your insurer pays the rest. It is one of the most impactful decisions in any insurance policy — the right deductible can save you hundreds per year in premiums while still protecting you from catastrophic losses.

How deductibles work with a real example

Your car is damaged in a parking lot collision. Repair estimate: $2,400. Your collision deductible: $500. You pay $500. Your insurer pays $1,900.

If the repair estimate were $400 — less than your deductible — you would pay the full $400 out of pocket and receive nothing from your insurer. This is an important concept: deductibles apply per claim, not per year (except for health insurance, which works differently).

Higher deductibles mean lower premiums

The relationship is predictable: a higher deductible transfers more risk to you and less to the insurer, so the insurer charges you less. Raising your collision deductible from $250 to $1,000 can reduce your premium by 15-30%.

The break-even analysis: if you raise your deductible by $500 and save $150/year in premium, you need 3.3 years of claim-free driving to break even. If you go 5+ years without a claim — which most drivers do — you come out ahead.

The right deductible depends on your emergency fund

The ideal deductible is the highest amount you can comfortably pay out of pocket without financial stress if you have a claim. If you have $3,000 in savings you can access easily, a $1,000 deductible is reasonable. If your savings are tight, a $500 deductible provides more predictable out-of-pocket costs.

Do not raise your deductible higher than you can realistically pay. An uncovered deductible can delay a claim or force you into debt.

Health insurance deductibles work differently

Health insurance deductibles reset annually and typically apply to all covered services in that year until met. Once you hit your deductible, you pay coinsurance (a percentage) until reaching your out-of-pocket maximum. Use the health deductible calculator to model your expected annual costs under different deductible levels.