Deductible
Also called: excess
The first slice of an insured loss you pay yourself before cover begins.
If your deductible is 500 and the claim is 3,000, you pay the first 500 and the insurer pays 2,500.
It exists for a reason that is not purely commercial: without one, insurers would be processing endless small claims and premiums would rise for everyone. It also keeps you mildly invested in not making claims.
The lever it gives you is direct. A higher deductible buys a lower premium, because you are retaining more of the small risk yourself. Over many years, choosing the highest deductible you could comfortably absorb usually costs less in total than paying elevated premiums for cover you rarely claim on.
The condition attached to that: you need the deductible sitting in cash. A high deductible with no emergency fund is not a saving, it is a bet that nothing happens — and when something does, the shortfall goes on a credit card at a rate that erases years of premium savings.
So the sequence is buffer first, then raise the deductible. Not the reverse.
Words on this page
- Premium — What you pay for insurance — the regular cost of transferring a risk to someone else.
- Risk — The chance that an outcome is permanently worse than you needed it to be.
- Emergency fund — Cash set aside to cover unexpected, necessary and urgent costs, so they do not become debt.
- Buffer — A small amount of cash held back so that an ordinary bad week does not create new debt.
Related terms
Covered properly in Learn.
This term appears in the glossary of The Quiet Fortune, Volume II.