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Deductible

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Title: Deductible  
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Subject: Pet insurance, Vehicle insurance, Auto insurance risk selection, Insurance, Tax-deductible loss
Collection: Economics of Uncertainty, Health Economics, Insurance Terms
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Deductible

In an insurance policy, the deductible is the amount of expenses that must be paid out of pocket before an insurer will pay any expenses.[1] In general usage, the term deductible may be used to describe one of several types of clauses (see below) that are used by insurance companies as a threshold for policy payments.

Deductibles are typically used to deter the large number of claims that a consumer can be reasonably expected to bear the cost of. By restricting its coverage to events that are significant enough to incur large costs, the insurance firm expects to pay out slightly smaller amounts much less frequently, incurring much higher savings. As a result, insurance premiums are typically cheaper when they involve higher deductibles. For example, phone companies offer replacement plans, with the deductible set at the level of the wholesale price of the phone. As added benefit to them, the customer does not switch to different company as they often do with a new phone purchase.

Deductibles are normally provided as clauses in an insurance policy that dictate how much of an insurance-covered expense is borne by the policyholder. They are normally quoted as a fixed quantity and are a part of most policies covering losses to the policy holder. The insurer then becomes liable for claimable expenses that exceed this amount (subject to the maximum sum claimable indicated in the contract). Depending on the policy, the deductible may apply per covered incident, or per year. For policies where incidents are not easy to delimit (health insurance, for example), the deductible is typically applied per year.

Several deductibles can be set by the insurer based on the cause of the claim. For example, a single housing insurance policy may contain multiple deductible amounts for loss or damage arising from theft, fire, natural calamities, evacuation etc.

There are also deductible reimbursement programs that reimburse a deductible in the event of an automobile, home, boat/yacht or health insurance claim.

Deductible vs. franchise

A deductible should not be confused with a franchise. Where a deductible represents a part of the expense for which the insurer is not liable, the franchise is a pure threshold that, when exceeded, transfers liability for the entire expense to the insurer. For example, with a franchise of $20,000, a claim of $19,900 is borne entirely by the policy holder and a claim of $20,500 is borne entirely by the insurer.

Deductible vs. excess

An excess can refer to one of two very different insurance terms.

The first is excess-post-hospitalization which refers to the extra costs borne by the insured over and above the maximum coverage that the insurance company pays. This terminology is especially common in areas of insurance sensitive to loss (like liability insurance) and is addressed by the insurance market through excess line insurance companies through mechanisms like excess insurance, gap insurance, and umbrella insurance.

The second is excess-pre-hospitalization which refers to an insurance exception that is (often interchangeably but wrongly) referred to also as an excess or a deductible. It is "the first amount of the claim which the insured has to bear. If the insured has an excess of $500 and the total repair costs $3,000, then the insured has to pay $500 while the insurer pays the remaining $2,500."[2]

Automobile and property insurance

In a typical automobile insurance policy, a deductible will apply to claims arising from damage to or loss of the policy holder's own vehicle, whether this damage/loss is caused by accidents for which the holder is responsible, or vandalism and theft. Depending on the policy, the deductible may differ based on the type of expense incurred that triggers the insurance claim.[2] Third-party liability coverages including auto liability, general liability, garagekeepers, inland marine, professional liability and workers compensation are also written with deductibles. These deductibles on commercial liability policies are known as third party deductibles or liability deductibles. Because the insured and claimant are not the same entity, insurers cannot pay the claim minus the deductible. This creates a receivable owed from the insured to the insurer. Due to the complexity of identifying these third party deductible receivables, many are often missed by the insurer causing millions of dollars to go uncollected.[3]

Health and travel insurance

See insurance copayment

Most health insurance policies and some travel insurance policies have deductibles as well. The type of health insurance deductibles can also vary, as individual amounts and family amounts.

Given the nature of medical treatment, the insured often faces multiple medical expenses spread over several days for a single illness or injury. Due to this reason, health insurance deductibles often tend to be imposed on a term basis (e.g. annually) as opposed to a per-visit threshold.[4] In spite of this, major medical insurance policies may have a per-visit excess which often does not cover the cost of routine visits to a GP, unless it is certified to be a part of a continuous treatment (and the bills can be collated in a single claim).

Industrial and commercial insurance

In industrial risks it is also common for the deductible to be expressed as a percentage of the loss, often though not always, with a minimum and maximum amount. This is similar to co-insurance, where the company pays a certain percentage of the losses, coupled with minimum and maximum payment thresholds. For example, with a deductible of 10% with a minimum of $1,500 and maximum of $5,000, a claim of $25,000 would incur a deductible of $2,500 (i.e. 10% of the loss) and the resulting payment would be $22,500. A claim below $15,000 would incur the minimum deductible of $1,500 and a claim above $50,000 would incur the maximum deductible of $5,000.

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References

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