A percentage deductible is a type of insurance deductible where the amount you’re responsible for paying out of pocket is calculated based on a percentage of the insured value of your property, rather than a fixed dollar amount.
Here’s how it’s typically calculated
- Determining the Insured Value: First, the insurance policy will specify the insured value of your property. For example, if you have a home insurance policy, the insured value would be the total value of your home and its contents as determined by the insurance company.
- Percentage Deductible: The insurance policy will specify a percentage deductible, which is the percentage of the insured value that you’re responsible for paying in the event of a claim. This percentage can vary depending on the type of coverage and the terms of your policy.
- Calculation: When you file a claim, the insurance company will assess the total amount of the covered loss. Then, they’ll calculate your deductible by applying the specified percentage to the insured value of your property.
For example, let’s say you have a home insurance policy with a 2% deductible, and your home is insured for $300,000. If you file a claim for $10,000 in damages, the calculation would be:
Deductible = Insured Value of Property × Percentage Deductible = $300,000 × 2% = $6,000
So, with a 2% deductible, you would be responsible for paying the first $6,000 of the $10,000 claim, and the insurance company would cover the remaining $4,000.
Percentage deductibles are often used in property insurance policies like homeowners insurance and can help to align the deductible amount with the value of the insured property.
Why a Percentage Deductible is Bad
A percentage deductible is a type of insurance deductible where the amount you’re responsible for paying out of pocket is calculated based on a percentage of the insured value of your property, rather than a fixed dollar amount. While percentage deductibles have their advantages, they also come with some drawbacks compared to fixed-price deductibles.
The main disadvantage of a percentage deductible is the potential for higher out-of-pocket costs, especially for high-value properties. Since the deductible is calculated based on a percentage of the insured value, it can result in significantly higher deductibles for more expensive properties. This means that if you have a higher-valued property and need to file a claim, you could be facing a substantial out-of-pocket expense before your insurance coverage kicks in.
Furthermore, percentage deductibles can lead to uncertainty for policyholders. Since the deductible amount is tied to the insured value of the property, changes in property values can impact the deductible amount from one policy period to the next. This can make it difficult for homeowners to accurately predict their potential out-of-pocket costs in the event of a claim.
In contrast, fixed-price deductibles offer a more predictable and straightforward approach. With a fixed-dollar deductible, policyholders know exactly how much they’re responsible for paying out of pocket for each claim, regardless of the value of their property. This can provide greater peace of mind and financial certainty, especially for homeowners with high-value properties.
Ultimately, the choice between a percentage deductible and a fixed-price deductible depends on your individual circumstances and risk tolerance. While percentage deductibles can help align the deductible amount with the value of the insured property, they can also result in higher out-of-pocket costs and uncertainty for policyholders.