The deductible must be paid by the insured, before the benefits of the policy can apply. Typically, a general rule is: the higher the deductible, the lower the premium, and vice versa. Depending on the policy, the deductible may apply per covered incident, or per year. For policies where incidences are not easy to delimit (for example health insurance), the deductible is typically applied per year.
A deductible is also known as excess in some countries, especially the United Kingdom. However, an excess and deductible are slightly different, even though they are generally used as synonyms.
An excess is an amount a policyholder must bear before the liability passes to the insurer (subject to the sum insured). Whereas a deductible is an amount deducted from the claim amount.
It doesn't make much sense, does it? You pay your premium every month. And then, when you file a claim, you have to pay even more money “the deductible” before your insurance policy begins reimbursing you.
Why? Because a deductible helps insurance companies guard against what is called a moral hazard. That's just a way of saying that once a risk has no consequences, there's no incentive for people to guard against it.
For example, many people have criticized state-run “high-risk” homeowners programs that guarantee coverage to people living in areas that most insurance companies consider to risky to insure.
Here’s another example: what if you never had to meet a deductible or make a copay to visit the doctor? From an insurance company’s point of view, you’d be more likely to run to the doctor for every little bump and bruise. Of course, not everyone would do that. But insurance companies have to protect against the few people that would... and who would drive up rates for everyone.
The deductible is only one way that insurers try to limit their risk. They also use underwriting a detailed analysis of the risk a potential policyholder poses.
