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The Pros and Cons of Increasing Your Insurance Deductibles

When it comes to insurance, one of the decisions you may have to make is whether to increase your deductibles. A deductible is the amount of money you have to pay out of pocket before your insurance coverage kicks in. Increasing your deductibles can have both pros and cons, and it’s important to carefully consider these factors before making a decision. In this article, we will explore the advantages and disadvantages of increasing your insurance deductibles, backed by research and real-life examples.

The Pros of Increasing Your Insurance Deductibles

1. Lower Premiums:

One of the main advantages of increasing your insurance deductibles is that it can lead to lower premiums. Premiums are the amount of money you pay for your insurance coverage. By opting for a higher deductible, you are essentially taking on more risk, and insurance companies reward this by offering lower premiums. This can result in significant savings over time, especially if you have multiple insurance policies.

2. Financial Flexibility:

Increasing your deductibles can provide you with greater financial flexibility. By having a higher deductible, you are essentially self-insuring for smaller claims. This means that you can use the money you save on premiums to build an emergency fund or invest in other areas of your life. Having a financial cushion can provide peace of mind and help you weather unexpected expenses.

3. Discourages Small Claims:

When deductibles are low, policyholders may be more inclined to file small claims for minor damages or losses. However, by increasing your deductibles, you are less likely to file small claims because the cost of the deductible may outweigh the benefit of making a claim. This can help you maintain a good claims history, which can be beneficial in the long run as it may result in lower premiums and better coverage options.

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4. Encourages Responsible Behavior:

Increasing your deductibles can encourage responsible behavior. When you have a higher deductible, you are more likely to take precautions to prevent accidents or damages that could result in a claim. For example, if you have a higher deductible on your auto insurance, you may be more cautious while driving to avoid accidents. This can lead to safer behavior and ultimately reduce the likelihood of having to make a claim.

5. Long-Term Savings:

While increasing your deductibles may mean paying more out of pocket in the event of a claim, it can result in long-term savings. If you have a good claims history and rarely make claims, the savings you accumulate from lower premiums over time can outweigh the additional costs of a higher deductible. This is especially true for individuals who have a low risk of making frequent claims.

The Cons of Increasing Your Insurance Deductibles

1. Higher Out-of-Pocket Expenses:

One of the main disadvantages of increasing your insurance deductibles is that it can lead to higher out-of-pocket expenses. If you have a higher deductible, you will have to pay more money upfront before your insurance coverage kicks in. This can be a significant financial burden, especially if you have a large claim or multiple claims within a short period of time.

2. Limited Coverage for Small Claims:

By increasing your deductibles, you may find that your insurance coverage is limited for smaller claims. If the cost of the damage or loss is below your deductible amount, you will have to pay for it out of pocket. This can be frustrating, especially if you have been paying premiums for years and expect your insurance to cover all types of claims. It’s important to carefully consider the potential costs of smaller claims before increasing your deductibles.

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3. Potential for Financial Strain:

Increasing your deductibles can potentially put a strain on your finances, especially if you are not prepared for unexpected expenses. If you have a high deductible and are faced with a large claim, you may find it difficult to come up with the necessary funds to cover the deductible. This can lead to financial stress and may even result in debt if you have to borrow money to pay for the deductible.

4. Risk of Underinsurance:

When you increase your deductibles, there is a risk of being underinsured. Underinsurance occurs when the amount of coverage you have is not sufficient to cover the full cost of a claim. If you have a high deductible and the cost of a claim exceeds your coverage limits, you may be responsible for paying the difference out of pocket. It’s important to carefully review your insurance policies and ensure that you have adequate coverage before increasing your deductibles.

5. Potential for Higher Claims:

While increasing your deductibles may discourage small claims, it can also lead to a higher likelihood of filing larger claims. When policyholders have a higher deductible, they may be more inclined to file a claim for significant damages or losses, as the deductible amount is already substantial. This can result in higher claims for insurance companies, which may lead to higher premiums for policyholders in the long run.

Conclusion

Increasing your insurance deductibles can have both pros and cons. It’s important to carefully consider your financial situation, risk tolerance, and the potential costs and benefits before making a decision. While increasing your deductibles can lead to lower premiums, financial flexibility, and encourage responsible behavior, it can also result in higher out-of-pocket expenses, limited coverage for small claims, and the potential for financial strain. It’s crucial to strike a balance between saving on premiums and ensuring that you have adequate coverage in the event of a claim. Ultimately, the decision to increase your insurance deductibles should be based on your individual circumstances and needs.

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