Deductibles: The Most Confusing Word in Insurance (Made Simple)

Look, I get it. The word "deductible" sounds like something your accountant mutters during tax season. But here's the thing: if you have insurance — any insurance — you need to understand what a deductible actually is. Not because I'm trying to sell you something, but because it's the difference between "I can handle this claim" and "why is my bank account crying?"

So let's cut through the jargon and talk about deductibles like actual humans.

What Is a Deductible, Really?

A deductible is the amount you pay out of pocket before your insurance kicks in to cover the rest.

That's it. That's the whole concept.

Here's the analogy that always clicks for people: Think of your deductible like a cover charge at a club. You pay the first $500 (or $1,000, or $2,500 — whatever your deductible is), and then insurance picks up the tab for everything after that.

Example time: Let's say your home gets hit by a tree during a storm (welcome to California). The damage costs $10,000 to repair. If you have a $1,000 deductible, you pay the first $1,000, and your insurance company covers the remaining $9,000.

Simple, right? So why does everyone get confused?

The Part That Trips People Up

Here's where it gets weird: different types of insurance handle deductibles differently.

Home Insurance: Per Claim

Every time you file a claim, you pay your deductible. Tree falls on your house? $1,000 deductible. Pipe bursts three months later? Another $1,000 deductible. Each claim resets the clock.

Auto Insurance: Per Incident

Same deal as home insurance. You rear-end someone? Pay your collision deductible. Someone keys your car a month later? Pay it again.

Health Insurance: Annual

This one's different. You pay your deductible once per year, and then it's done. After that, you're usually just paying copays or coinsurance until you hit your out-of-pocket maximum. (Health insurance is its own nightmare — we'll save that for another post.)

The confusion comes when people assume all insurance works the same way. It doesn't. And that's why I spend half my time explaining this stuff at dinner parties. (Yes, I'm that guy at parties. My wife loves it.)

High Deductible vs. Low Deductible: The Eternal Question

Okay, so now you know what a deductible is. Next question: How do you pick the right one?

This is where people either overthink it or don't think about it at all. Let me walk you through the trade-off:

Higher Deductible = Lower Premium

If you choose a $2,500 deductible instead of a $500 deductible, your monthly (or annual) premium will be cheaper. Sometimes significantly cheaper.

Why? Because you're telling the insurance company, "I'll handle the small stuff. You just cover the catastrophic stuff." They like that. They reward you with lower premiums.

Lower Deductible = Higher Premium

If you choose a $500 deductible, your premium will be higher. You're essentially paying the insurance company to cover more of the risk upfront.

So which one should you choose?

How to Pick Your Deductible (Without Guessing)

Here's my completely unscientific but incredibly practical test:

Ask yourself: "If I had to write a check for [deductible amount] tomorrow, would it hurt, or would it just be annoying?"

Let me give you a real-world example. When my wife and I bought our first house in San Francisco (back when that was still possible without selling a kidney), we went with a $2,500 deductible on our homeowners policy. Why? Because we had an emergency fund that could cover it, and the premium savings were significant.

But here's the thing: we actually had the $2,500 set aside. We didn't just assume we'd "figure it out" if something happened. That's the key.

If you pick a high deductible to save money on premiums but you don't actually have that amount in savings, you're setting yourself up for a bad time.

The Mistake I See All the Time

People pick the highest deductible possible to get the lowest premium, and then they never file claims because they can't afford the deductible.

That's not insurance. That's just paying for a policy you'll never use.

I had a client a few years ago who chose a $5,000 deductible on his homeowners policy to save about $300 a year. Seemed smart. Then he had $8,000 in water damage from a failed water heater. He could technically file a claim, but after paying the $5,000 deductible, he'd only get $3,000 from insurance. So he just... didn't file. He paid the whole thing out of pocket and was furious.

Could he afford the $8,000? Yes. But he spent months bitter about "wasting money on insurance." And honestly? He had a point. His deductible was too high for his situation.

Lesson: Don't pick a deductible you can't comfortably afford to pay.

One More Thing: Percentage Deductibles

Oh, and just to keep you on your toes: some policies (especially homeowners insurance in certain states) have percentage-based deductibles instead of flat amounts.

For example, if your home is insured for $500,000 and you have a 2% deductible, you'd pay $10,000 out of pocket before insurance kicks in.

Yeah. $10,000.

This is common in areas prone to wind or hail damage (hello, coastal California). And it's something people don't realize until they file a claim and get a very unpleasant surprise.

So when you're reviewing your policy, check whether your deductible is a flat amount or a percentage. It matters. A lot.

The Bottom Line

Deductibles aren't complicated once you understand the basic concept: it's the amount you pay before insurance pays.

The trick is picking the right deductible for your situation:

If you're not sure, talk to your agent. (Or, you know, talk to me.) This is literally what we do all day.

And if you've made it this far and you're thinking, "Wow, insurance is way more nuanced than I thought" — welcome to my world. It's why I started Growing Up Covered in the first place.

More posts coming soon. Probably with a baby strapped to my chest.

The "Sweet Spot" Deductibles (Where the Math Actually Works)

Okay, so you understand the trade-off between high and low deductibles. But here's what nobody tells you: there's usually a sweet spot where you get the best bang for your buck.

Go too low with your deductible, and you're overpaying in premiums for minimal benefit. Go too high, and the premium savings don't justify the risk. Let me break down the common sweet spots for home and auto insurance.

Home Insurance: The $1,000-$2,500 Range

For most homeowners, the sweet spot is between $1,000 and $2,500.

Here's why:

Real talk: I've run hundreds of quotes over the years, and the $1,000-$2,500 range consistently offers the best risk-to-reward ratio for most homeowners. It's high enough that you're not overpaying in premiums, but not so high that you're stuck with a massive bill you can't cover.

Auto Insurance: The $500-$1,000 Range

For auto insurance, the sweet spot is usually lower: $500 to $1,000.

Here's the breakdown:

I usually recommend $500 for comprehensive and collision coverage. It's low enough that you won't hesitate to file a claim if you need to, but high enough that you're not overpaying in premiums.

The Litmus Test

Here's how I'd summarize the sweet spots:

Of course, your situation might be different. If you have a massive emergency fund and you're comfortable self-insuring more risk, go higher. If you're living paycheck to paycheck, go lower (but seriously, build that emergency fund).

But for most people? These ranges hit the sweet spot where you're saving real money on premiums without setting yourself up for a financial gut-punch if something goes wrong.

What Is a Deductible, Really?

A deductible is the amount you pay out of pocket before your insurance company pays anything.

That's it. Simple definition. But here's where it gets confusing in practice.

Let's say your home suffers $10,000 in damage from a storm. You have a $1,000 deductible. You pay the first $1,000. Insurance pays the remaining $9,000.

Or let's say you back into a pole and cause $2,000 in damage to your car. You have a $500 deductible. You pay $500, insurance covers $1,500.

The deductible applies per claim, not per year. So if you file three separate claims in one year, you're paying your deductible three times.

Now here's what confuses people: not all insurance works the same way. Auto and home insurance have deductibles. Life insurance doesn't. And that's why I spend half my time explaining this stuff at dinner parties. (Yes, I'm that guy at parties. My wife loves it.)

High Deductible vs. Low Deductible: The Eternal Question

Okay, so now you know what a deductible is. Next question: How do you pick the right one?

This is where people either overthink it or don't think about it at all. Let me walk you through the trade-off:

Higher Deductible = Lower Premium

If you choose a $2,500 deductible instead of a $500 deductible, your monthly (or annual) premium will be cheaper. Sometimes significantly cheaper.

Why? Because you're telling the insurance company, "I'll handle the small stuff. You just cover the catastrophic stuff." They like that. They reward you with lower premiums.

Lower Deductible = Higher Premium

If you choose a $500 deductible, your premium will be higher. You're essentially paying the insurance company to cover more of the risk upfront.

So which one should you choose?

How to Pick Your Deductible (Without Guessing)

Here's my completely unscientific but incredibly practical test:

Ask yourself: "If I had to write a check for [deductible amount] tomorrow, would it hurt, or would it just be annoying?"