Is it a good idea to get an insurance policy with no deductible?
An insurance policy with no deductible sounds too good to be true. Is it a smart idea or is there a catch?
An insurance policy without a deductible can be quite appealing. But like everything else in life, if it sounds too good to be true, it probably is.
A deductible is the amount the insured has to pay before the insurance company will make a payment on a claim. If your policy has a $500 deductible and you have a loss that comes up to $1,100, you will need to pay the first $500 of that yourself and your insurance company will pay the remaining $600 (to learn more about insurance payments, see All the Ways You Pay: Premiums, Deductibles, Co-pays, and Coinsurance).
Insurance policies have deductibles in order to reduce the number of claims the insurance company has to pay and to get rid of small "nuisance" claims. If your policy has a $500 deductible, you wouldn't bother filing a claim for a $200 loss because if you do, you won't get a dime. Claims processing is a time-consuming task and cutting out losses below a certain threshold reduces the amount of paperwork the insurance company has to do on a daily basis, and it makes insurance more affordable, too. A deductible also makes you partly responsible for every claim, which will hopefully encourage you to be more careful (avoiding what insurers call moral hazard) and, hence, file fewer claims.
Now, that sounds great for the insurance company, but what about you? Are you a chump for paying a deductible when there are no-deductible policies out there?
Not really. What's good for the insurance company is often good for the policyholder, too. A policy without a deductible means more losses and higher administrative costs. There's no such thing as a free lunch, so those costs are passed on to you in the form of higher premiums up front.
That being said, there are some innovative companies these days offering no-deductible policies while using artificial intelligence to help them process claims. This significantly reduces the costs associated with processing claims, which allows them to offer policies that have no deductibles with only a slight premium increase to make up for the increased number and value of claims (to get the best deals on your policy, see our Top Twitter Feeds to Follow if You Want to Save on Insurance).
If you can find a no-deductible insurance policy that is competitively priced, then it might be an attractive way to go. You must perform an internal calculation between the cost of paying a deductible when you have a claim versus paying a higher premium up front. My guess is that, for most people, filing a claim happens so infrequently that eliminating the deductible won't come close to making up for the higher premium (for more deductible advice, see The Pros and Cons of Increasing Your Auto Deductible).
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Jacques grew up around the insurance industry and began actively participating in 2013. Since then, he has gotten a Level 2 license, won Insurance Council of BC awards in 2015 and 2020 for academic excellence in the insurance licensing courses. He educates insurance professionals through PNC Learning and as a Thought Leader at ReFrame Insurance.
In his day job as an insurance broker, he helps businesses with creative risk management solutions and strategic advice when it comes to insurance.[Read full bio]