INSURANCE

In an insurance policy, the Deductible (North American term) or Excess (UK term) is the portion of any claim that is not covered by the insurance provider. It is normally quoted as a fixed quantity and is a part of most policies covering losses to the policy holder. 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.

In a typical automobile insurance policy, a deductible will apply to claims arising from damage to or loss of the policy holder's own vehicle, whether this damage/loss is caused by accidents for which the holder is responsible, or vandalism and theft. Third-party liability coverage generally has no deductible, since the third party will likely attempt to recover any loss, however small, for which the policy holder is liable.

Most health insurance policies and some travel insurance policies have deductibles as well. The type of health insurance deductibles can also vary, as individual amounts and family amounts. Major medical insurance policies are known for often having a deductible which does not cover the cost of routine visits (e.g., to a doctor's office).

For example, a person might have an auto insurance policy with a $500 deductible on collision coverage. If this person were in an accident that did $800 worth of damage to the car, then the insurance company would pay him or her $300. The insured is responsible for the first $500 of damage (the deductible), and the insurance company pays the balance. In industrial risks it is also common for the deductible to be expressed as a percentage of the loss, often though not always, with a minimum and maximum amount, for example 10% of loss minimum 1,500USD max 5,000USD. Therefore in the event of a claim totaling 25,000USD the applicable deductible is 2,500 (i.e. 10% of the loss), meaning that the assured would receive an indemnity payment from the insurer of 22,500USD. Obviously if the claim only amounts to 7,500USD then the applicable deductible is 1,500USD and not 10% of the loss, since 10% is below the minimum deductible level. Similarly, in this instance, for losses above 50,000USD the deductible will never be more than 5,000USD. Deductibles can also differ depending on the cause of the claim: the same policy can contain varying deductibles which are applied to loss or damage arising from theft, fire, natural perils, etc.

For example a plastics factory may have a deductible of 10,000 for theft, 50,000 for natural perils and 100,000 for fire.

A deductible should never be confused with a franchise, the latter representing a threshold which needs to be exceeded in order for the insurer to be liable for the entirety of the claim. In other words, with a franchise of 20,000USD a claim of 19,900 USD is borne entirely by the assured whereas in the event of a claim totaling 20,500 USD the insurer would be liable for the whole amount.

There are also deductible reimbursement programs that reimburse a deductible in the event of an auto, home, or health insurance claim.

An investor should consider the financial strength of the insurance company that writes annuity contracts. Major insolvencies have occurred at least 62 times since the conspicuous collapse of the Executive Life Insurance Company in 1991.

Insurance company defaults are governed by state law. The laws are, however, broadly similar in most states. Annuity contracts are protected against insurance company insolvency up to a specific dollar limit, often $100,000, but as high as $500,000 in New York, New Jersey, and the state of Washington. This protection is not insurance and is not provided by a government agency. It is provided by an entity called the state Guaranty Association. When an insolvency occurs, the Guaranty Association steps in to protect annuity holders, and decides what to do on a case-by-case basis. Sometimes the contracts will be taken over and fulfilled by a solvent insurance company.

The state Guaranty Association is not a government agency, but states usually require insurance companies to belong to it as a condition of being licensed to do business. The Guaranty Associations of the fifty states are members of a national umbrella association, the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA). The NOLHGA website provides a description of the organization, links to websites for the individual state organizations, and links to the actual text of the governing state laws.

A difference between guaranty association protection and the protection e.g. of bank accounts by FDIC, credit union accounts by NCUA, and brokerage accounts by SIPC, is that it is difficult for consumers to learn about this protection. Usually, state law prohibits insurance agents and companies from using the guaranty association in any advertising and agents are prohibited by statute from using this Web site or the existence of the guaranty association as an inducement to purchase insurance(e.g.). Presumably this is a response to concerns by stronger insurance companies about moral hazard.