When Should You Increase Insurance Deductibles?

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Insurance is your financial defense.

Insurance is not an optional component of a good financial plan because if you cut this corner, you expose yourself to too much risk.  In fact, not having an appropriate amount of insurance can cause serious financial damage.

However, one way to minimize the insurance pinch is to consider increasing your insurance deductibles.

Insurance Deductible Quick Review

The deductible is the portion of your insurance that you are required to pay when there is a claim.  For example, if your car coverage has a $500 deductible, that means you will pay the first $500 if there is a claim.

The Insurance Deductible and Premiums Teeter Totter

There is always a parallel relationship between deductibles and premiums.

The higher the deductible, the the lower the premium. The lower the deductible, the higher the premium.  You cannot have your cake and eat it too.

When one goes up, the other must come down.

To illustrate, I went to eHealthInsurance (affiliate link).  Before buying international health insurance, I had purchased my last policy through eHealthHnsurance.  I entered my actual family information and selected Blue Cross Blue Shield (I used to have BCBS health insurance) for their PPO Select Plan Saver IV (not a recommendation, but a selection).

Using that example, I got the following results:

Deductible $2,500 = Premium $377 monthly

Deductible $5,000 = Premium $290 monthly

By increasing my deductible by $2,500 annually, I could save $87.00 per month or $1044 per year.  That would be a great idea, as long as you are in a financial position to be able to increase your deductible.

Should You Increase Your Insurance Deductible?

The following questions can apply to all sorts of coverage: health, auto, renters, and home insurance.  How you answer the question impacts if you should increase your insurance deductible.

Question #1: Are you low risk?

For health coverage, ask yourself: is my family relatively healthy?  If yes, you are low risk.

In my case, other than medical bills when my wife has had a baby, we have never even come close to our deductible in the last 10 years.

If you are applying for health insurance, review your records over the last five years.  If you have not reached your deductible 3 out of 5 years, you could probably consider increasing your insurance deductible.  More often than that, and it might not make financial sense.

If you are talking about auto coverage and you have a teenager whom you do not trust, you might need to keep a higher deductible. And don’t forget to pray.

Question #2: Are you and your children responsible?

Insurance money is not a waste of money.  Nor is insurance a way to get rich quick.  It is simply a way to be sure you are financially progressing.  Insurance allows you to move forward without the risk of sliding backwards.

When you increase your insurance deductibles, in some ways you do increase your risk.  As such, be sure that, for example, teens in the house understand the importance of safe driving.

If you are a responsible person, it will be reflected in your insurance.  Non-smokers pay less for life insurance.  Teens with better grades pay less for auto insurance.  Adults with better FICO scores pay less for insurance.

Question #3: Do you have double your highest deductible in an emergency fund?

Let’s say you’re thinking about increasing your health insurance to a $5,000 deductible.  In this case, you would need to be sure you have at least $10,000 in an emergency fund.

Should it be double the sum of all your insurance deductibles?

No, I don’t think so.  I’m assuming you won’t reach your deductible on your auto insurance, house insurance, and health insurance all in the same year.

For this reason, if you are in good financial shape and you double your highest deductible, you can cover it from your emergency fund.

Note: Technically, for a family you might have a total payout limit of $15,000, (deductible of three family members) so you should have at least $30,000 in an emergency fund.  However, the likelihood (if healthy) of three family members all reaching their deductible in the same year is quite slim.  As a result, use the double a single deductible as a guide.

Special note to those in debt:

Those in debt will need to do a little extra math here.  Most likely, you will be better off keeping a minimal emergency fund, regular deductibles, and paying off your debt.  However, if your insurance savings are dramatic enough, you could consider putting your debt repayment on hold while you built up an emergency fund so that you could increase insurance deductibles.

Since your case is fact dependent, you will need to run your own numbers on this one, but I think you will be better off focusing on your debt.

Keep your emergency fund in an account without risk.

Since your emergency fund now has a backup insurance role, you need to be extra sure that these funds are safe.  Just realize the return you are getting on these funds is as much what they are saving you in premiums as what you are getting in interest.  Currently, high yield savings accounts are getting (on average) about 5x money market accounts, so I would suggest a high yield savings account like ING Direct.

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