Understanding The Difference Between "Deductible" And "Premium"

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Insurance 101: Tips and Tricks to Choosing the Right Policy

Since my parents always added me to their auto insurance policy when I was a teenager, I never learned how to make educated insurance policy decisions. When I moved out of my parents house at the age of 25 and it was time to get my own policy, I was overwhelmed with all of the decisions I had to make. Thankfully, my parents were eager to teach me what each insurance coverage option meant and what the best choices were for me. I learned a lot about insurance during this experience, and I am eager to share what I learned with others on my new blog. I also plan to include many tips on choosing health and homeowners insurance policies, so check back often if you want to learn a little more about insurance!


Understanding The Difference Between "Deductible" And "Premium"

23 November 2018
 Categories: Insurance, Blog

People who are not in the business of selling insurance are regularly confused as to insurance terminology and how homeowners insurance policies work. For example, "deductible" and "premium" are the two most commonly confused words. Consumers also get confused about claims payments, thinking that one of these two words mean "payment on a claim." As you begin to look into homeowners insurance policies for the very first time, here is how you can understand and keep separate what "deductible" and "premium" mean, and what it will cost you if you do not.


This is nothing like the deductible on your taxes. It DOES NOT give you money back. A deductible is the amount of money you pay to cover the expenses on a particular home repair issue before the insurance company will ever pay a dime. For example, say that you choose a homeowner's policy that has a $3,000 deductible. Then your roof catches fire, and there is $20,000 in damage. 

You are responsible to pay the first $3,000, and then the insurance company will cut you a check to pay for the rest of the damages. That is what "deductible" in this case means; it means the amount of money the insurance company deducts from the estimated damages in need of repair before they cut an insurance claim check. 


A premium is what you pay every month. It is not "premium" in the sense that it has premium value to you. It is premium to the insurance company because it is profit in the bank when no claims are filed against the policy. When you pay your monthly premiums, you are covered against everything that your insurance policy covers. 

When you do not pay your premiums, you will lose your coverage, and possibly be left with thousands of dollars in damage for which you alone will have to pay because there is no insurance coverage to file a claim against. When you do need to file a claim, the premiums, in a much smaller sense, come back to you to fix your home.

What It Will Cost You If You Do Not Understand These Terms

Not understanding that a deductible is what you have left to pay when something tragic happens to your home means that you could end up selecting a policy that seems cheap enough in monthly payments, but is exorbitant on the other end. Maybe you pay $100 a month in premiums, but your deductible is $10,000. Ouch; that is a lot of money you would have to pay out-of-pocket before anything is covered.

What's more, if the damages cost less than your deductible, then your insurance claim would be meaningless. Premiums are another problem. You have to understand that a premium is your monthly insurance payment to the insurance company. You need to select one that you can afford, but it should also have a deductible you can live with.

For more information, contact a company like ALTRE Insurance Agency Inc.