Are Higher Deductibles Worth it?

There is a LOT of conflicting information on the value of higher deductibles. Unfortunately, most of it is MISinformation delivered by self-interest of the advisor who is giving the advice.

Why would someone deliberately offer bad advice when it comes to deductibles? In Property & Casualty insurance a higher property deductible (damage to your own insured property) always lowers your premiums;

  1. It does mean you share a larger portion of your physical loss which is why insurers will pay proportionally less and does allow them to lower your premiums
  2. More importantly it demonstrates an insured’s care in avoiding claims. It also changes behaviour and encourages insured’s from making “nuisance” claims resulting in fewer overall claims thus further reducing the cost of your insurance.

The main reason why most advisors don’t want clients to have lower deductibles is that it will reduce their income from commissions which are what they make from the premiums which the client pays. The ugly truth about commission income is that it can make those that make it act in ways that are contrary to the best interest of their clients.

What you almost NEVER see publicly acknowledged is that having a claim will almost certainly cancel any CLAIMS FREE discount in future years. So, while the savings of a higher deductible will usually start at around 10%, the cost of a claim could be an additional 25% (in the loss of a claims free discount) in annual premiums.

What about the argument of insurance being there to pay for claims? This is absolutely true but insurance is NOT a maintenance policy and does not replace the need for proper care and maintenance by the insured. It truly is for unforeseen insurable disastrous events.

Ultimately, the lowest cost insurance program will always be for those with the fewest claims. Another true benefit of having a good claims record is the fact that insurance companies will always compete for your business. This will ensure that you will always have the lowest cost insurance. On the contrary, if you have claims you not only pay for that in much higher annual premiums but will likely have a much harder time finding a replacement insurance company.

On the furthest end of that spectrum, a high claims frequency can lead to cancellation of your property & casualty insurance policy and may make it impossible to find another insurer.