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What is Deductible in Property & Health Insurance? A deductible is a common policy provision in which the insured is required to pay a portion of the loss. In life insurance, a deductible is not used because the insured’s death is always a total loss, and a deductible would simply reduce the face amount of insurance.

The purpose of the deductible includes the following:

• To eliminate small claims
• To reduce premiums
• To reduce moral hazard and attitudinal hazard

A deductible eliminates minor claims, which are costly to handle and process.

Because deductibles eliminate minor claims, insurers’ loss-adjustment costs are reduced.

Deductibles are also used to reduce the insured’s premium payments.

When deductibles are used, it is possible to purchase insurance that protects against catastrophic losses at a lower cost.

The large-loss principle refers to the idea of using insurance premiums to pay for large losses rather than small losses.

The goal is to cover large losses that can financially ruin a person while excluding small losses that can be budgeted out of a person’s income.

Deductible in Property Insurance

Property insurance contracts frequently include the following deductibles:

Direct Deductible
Aggregate Deductible

Direct Deductible

A direct deductible requires the insured to pay a certain amount of loss before the insurer is required to make a payment.

A deductible of this type is typically applied to each loss.

A good example is auto collision insurance. Consider Anna’s new Toyota, which has collision insurance with a $500 deductible. If her collision loss is $6000, she will only receive $5500 and must pay the remaining $500 herself.
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Aggregate Deductible

An aggregate deductible is sometimes included in commercial insurance contracts. An aggregate deductible means that all losses that occur during a specific time period, typically a policy year, are added together to satisfy the deductible amount.

When the deductible is met, the insurer pays for all future losses in full.

Assume, for example, that the policy has a $10,000 aggregate deductible. Also, assume that $1000 and $2000 in losses occur during the policy year. Because the deductible is not met, the insurer pays nothing. I

If a third $8000 loss occurs during the same time frame, the insurer will pay $1000. Any other losses incurred during the policy year would be fully reimbursed.

Also Read: What is a Deductible for Car Insurance? Explained

Deductible in Health Insurance

The deductible in health insurance can be expressed in terms of dollars or time, such as a calendar-year deductible or an elimination (waiting) period.

Calendar-Year Deductible

A calendar-year deductible is a type of aggregate deductible found in medical expense policies for individuals and groups. Eligible medical expenses accumulate over the course of a calendar year, and once they exceed the deductible amount, the insurer is required to pay the benefits promised in the contract.

Once the deductible is met during the calendar year, the insured is not subject to any additional deductibles.

Period of Elimination (Waiting)

A deductible is also known as an elimination period. An elimination (waiting) period is a specified time period at the start of a loss during which no insurance benefits are paid.

An elimination period is appropriate for a single loss that occurs over time, such as lost work earnings. In disability-income contracts, elimination periods are commonly used.

Disability-income insurance contracts, for example, that replace a portion of a disabled worker’s earnings typically have elimination periods of 30, 60, or 90 days, or longer.