What Is an Insurance Deductible?

When you’re buying insurance, there’s a lot of jargon to wrap your head around. But one basic insurance term worth knowing about is deductible.

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So . . . what is an insurance deductible, and why is it important to know how to use one? And how do deductibles work in your home, auto and health insurance plans?

We’ll walk you through all you need to know about insurance deductibles and how to make the most of them!

What Is an Insurance Deductible?

An insurance deductible is the amount you must pay out of pocket before your insurance company covers the rest of a claim. The insurance company deducts that figure from the total amount of the insurance claim they pay.

The higher your deductible, the less you’ll pay in premiums for the insurance itself. (Premiums are what you pay to have the insurance coverage in the first place.)

To find out what your deductible is, whether it’s for your car or your home, look in the declaration summary of your policy document.

How Do Insurance Deductibles Work?

A deductible is a way for insurance companies to hedge how risky you are to insure. If you have to pay more out of pocket before your insurance kicks in (because you have a high deductible), you’re considered less of a risk. That’s because you’re taking on more of the cost yourself—and since you have more skin in the game, you’re less likely to file a claim.

But if you have a low deductible, you’re considered riskier to insure. Since you don’t have to pay much out of pocket before your coverage starts, you’re more likely to file a claim—costing the insurance company more money.

Zooming out, insurance transfers risk you can’t afford to the insurance company. So, when you’re trying to figure out whether to go with a high or low deductible, you have to figure out how much risk you can afford to take on.

If you haven’t saved $1,000 in your emergency fund yet, you can’t afford much risk. So you should set your deductibles as low as you can and transfer that risk to the insurance company. Once you’re debt-free and have your fully funded emergency fund, you can afford to take on more risk, so you can set your deductible higher.

How Does a Deductible Work With Home and Auto Insurance?

Here’s a look at how an auto insurance deductible works. Let’s say you have a $500 deductible on your car policy. You get into a fender bender on the way to work and file a claim with your insurance company to cover the damages.

The company approves your claim for $2,000 in repairs. It’s your responsibility to pay $500 toward repairs because that’s your policy’s deductible. The insurance company will cover the rest—in this case, $1,500. Pretty simple, right?

It works the same way for home insurance too.

Some insurers offer “disappearing” deductibles for home and auto policies, which lower your deductible each year you don’t file a claim. But these perks often cost extra and reset as soon as you file a claim, so we generally recommend saving that money for other financial priorities.

How Does a Deductible Work With Health Insurance?

Let’s face it: Health insurance is expensive, and bills for unexpected medical treatment can skyrocket. The average monthly cost of health insurance for an individual was $497 for a marketplace policy in 2025 and $114 for an employer-sponsored policy in 2024.^1,2

Thankfully, you can have some control over those numbers by adjusting your deductible. Let’s take a look at how these work now!

Health Insurance Deductibles

Health insurance deductibles work a little differently from other types, but the basics are the same. As with other types of insurance, your health insurance deductible is the amount you’re responsible for paying before the insurance provider begins to share some of the cost with you. Here’s the crucial health insurance difference: Along with your fixed-dollar deductible, you may have to cover other out-of-pocket costs—like copays and coinsurance—depending on your policy.

So, let’s say your health insurance plan has an annual $1,000 deductible. If you break your wrist playing pickleball, you’ll have to pay the first $1,000 in medical costs once the bills start coming in. After that, your health insurance coverage will kick in to help cover some of the remaining cost. 

And it’s good to remember that most health insurance plans cover routine checkups and preventive tests. Deductibles mainly apply when you need further treatment or hospital care. It’s always important to check your plan for more details about your deductible.

Copays vs. Deductibles

A copay is a fee that’s separate from a deductible. You pay it each time you visit your doctor or receive a health care service, although it may not apply to preventive care. It’s a fixed amount, set by your specific plan. The copay can change depending on the health care service you’re using (for example, a copay for a physical therapy session might be higher than a copay to your doctor for a checkup).

Coinsurance Explained

Once you’ve reached your deductible with your health insurance, you’ll still be responsible for your coinsurance payment. Coinsurance is your share of your health care costs for treatment you receive after you’ve paid your deductible.

The amount you pay in coinsurance is a percentage of the claim your health care provider files with your health insurance provider. The percentage depends on the plan you’ve chosen.  

So, if your coinsurance responsibility is 30%, that means your health insurance provider will pay 70% of each future bill once you’ve met your deductible.

Types of Insurance Deductibles

Insurance policies have one of two types of deductibles: a set amount or a percentage amount.

Fixed-Dollar-Amount Deductibles

This type of deductible is a set amount, like the $1,000 example we talked about above. Fixed-dollar-amount deductibles are set when you buy your policy, and they make it easier to plan your health care expenses. Most policies set minimum deductibles (more on these later). But it’s also possible to raise your deductible later so you can lower premiums.

Percentage-Based Deductibles

Percentage deductibles are primarily for homeowners insurance, and they normally apply to structural damage after unpredictable events like an earthquake, wind damage or hail damage. The percentage deductible is based on the value of the total insured amount.

Percentage deductibles can range from 1% to 10%.³

What Is a Minimum Deductible?

A minimum deductible is the lowest deductible amount available for a particular insurance policy. Insurance companies sometimes set their minimum deductibles based on the rules of the state they’re doing business in—especially those states more prone to natural disasters.⁴ 

As you’re shopping for insurance, the insurer will state their minimum deductible—typically about $500 for renters or home insurance and $250 for auto insurance.

The reason insurance companies set minimum deductibles is simple: so they don’t have to take on the financial cost of the whole claim. You’d have to shop around for a long time to find an insurance policy with a zero-dollar deductible.

How Can Deductibles Save You Money?

Raising your deductible is one of the key ways to lower your premiums and save on insurance. Like we mentioned at the beginning, that’s because you’re taking on more of the financial responsibility if you need to make a claim. Since the insurance company won’t have to pay out as much, they charge you less in monthly premiums.

You choose your deductible amount when you buy your insurance policy. How high or low you should set it depends on where you are in your financial journey. So use the following guidelines:

• If you don’t yet have a starter emergency fund ($1,000 cash to cover life’s little surprises), set insurance deductibles as low as possible in your policies until you get that cash in place. (But get it in place ASAP—it’s the first step toward real financial security.)
• If you’re paying off nonmortgage debt, keep those deductibles at a minimum so you can continue throwing every extra dollar at your debt.
• Once you’re debt-free and have a full emergency fund (3–6 months of living expenses in the bank), this is your chance to raise your deductibles so you can enjoy savings on premiums. (For example, going from a $500 deductible to $1,000 will get you a premium discount, for sure.) At this point, your savings can cushion more of the blow in an emergency, and your monthly budget will love those premium savings.

Let’s zero in on that last point for a minute. Would you believe that in decades of helping people get the right insurance at the right price, we’ve found that most customers could be saving money by raising their deductibles—but never pull the trigger? Whether that’s from lack of awareness or lack of time, it’s like leaving precious money on the table. Don’t let that be you.

Is It Worth It to Raise Your Deductible?

When deciding whether to raise your insurance deductible, you have to figure out if the money you’ll save on premiums is worth the extra you’ll spend out of pocket if you need to file a claim. You can find out by doing a simple break-even analysis.

For example, going from a $500 deductible to a $1,000 deductible increases your risk by $500. That only makes financial sense if you’ll save enough on your premium to break even within a reasonable time frame. If it only saves you $5 a month, it’ll take nearly a decade to break even. But if you can knock $50 off your monthly premium, you’ll break even in less than year.

And this is worth repeating: Make sure you have enough cash in your emergency fund to cover the higher deductible. But if you’ve gone a few years without making any home, health or auto insurance claims, why not spend less on the actual cost of insurance if you can?

By raising your deductibles and saving on premiums, you can put more money into your savings and investment accounts. And you can use those savings when you do have to make a claim.

Find the Right Insurance for Your Needs

If you’re searching for home, auto, health or any other type of insurance, then you need an experienced insurance advisor to help you.

Get in touch with one of our RamseyTrusted^® pros. These insurance experts have proven through their businesses that they care about helping everyone live the Ramsey way. That’s why we work with them! They can guide you through finding the insurance policy you need (with the best deductible).