Pros and Cons of Choosing an Insurance Policy With a Low Deductible

Deductible size is one of the biggest decisions insurance policy buyers must make. Whether buying home insurance, auto insurance, or most other types of insurance coverage, those purchasing coverage will get to decide how large their deductible should be.

Before making this choice, it's important to consider the pros and cons of opting for a low deductible on any insurance policy.

Pros of a low-deductible policy

There are several big benefits of choosing an insurance policy with a low deductible. Here are the advantages:

• More risk is transferred to the insurance company. A deductible is an amount that the insured policyholder must pay when a covered loss happens before the insurer pays anything. With a low-deductible policy, the policyholder pays very little out of pocket so they transfer more of the risk of financial loss to the insurer.
• A policyholder won't have to come up with a lot of cash when a covered disaster happens. Insurance pays out when something goes wrong, like a motor vehicle accident or problem at home. During this stressful time, having to come up with money to cover a deductible can just add more stress. With a low deductible, the policyholder will only need a small amount of money before the insurer picks up the rest of the tab.

Cons of a low-deductible policy

While there are advantages of a low-deductible policy, there are some downsides as well. Here are some of the disadvantages:

• Insurance premiums will be higher: Since the insurer is accepting more risk with a policy that has a low deductible, the insurer will end up charging higher premiums for the policy. This means a policyholder will have to pay more for their coverage.
• The policyholder may end up spending more in the long run. By paying more to transfer the risk of something going wrong, the insured policyholder could end up costing themselves more money over time if they never have a covered loss. Say, for example, that a policyholder pays an extra $10 a month to reduce their insurance deductible by $250. If the policyholder had saved that $10 on premiums for 25 months, they would have had enough to cover the deductible and then would be able to benefit from continuing to save $10 every month thereafter. So, if no covered loss happened within 25 months, they would have been better off with a higher deductible.

By weighing these pros and cons, insurance buyers can make the best choice about whether to opt for a high or a low deductible. Those who have the money to pay the deductible easily when a covered loss occurs may find they are much better off opting for a high-deductible plan.

But, anyone who would be stressed about having to find the cash and who would prefer higher fixed costs rather than a large surprise expense would likely be better off with a low-deductible plan.