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Deductible is the amount you pay before your insurance policy starts to pay. For example, with Rs.30,000 deductible, you pay the first Rs 30,000 of covered services. Insurer will only cover the claim amount if it is more than the deductible amount. Insured will reject any claim below the insurance deductible.
In other words, deductible refers to the amount of insured loss that you have to retain. Generally, more the deductibles involved in a policy, the lesser will be the premiums that you need to pay.
Deductibles apply to the defined contribution insurance plans and not defined benefit insurance plans like life insurance policies. The following policies may include deductibles:
a) Health Insurance
b) Car insurance
c) Property Insurance
d) Marine Insurance
Insurance is built based on 7 principles. One of the principles is loss avoidance and minimization. This principle governs that the insured must take all the necessary precautions and try to avoid or minimize the loss.
But the risk involved here is that some people might behave carelessly knowing that they have insurance. To remove this moral hazard deductibles are used. Since, the policyholder will also be responsible to bear part of the costs, he may not be as reckless and will try to avoid the loss.
Also, if the insurance is specifically designed to meet huge expenses, losses. Without deductibles, they will be put in a position to cover everything. Deductibles provide a safety cushion for companies since they only have to pay when the amount exceeds the deductibles.
Deductible in health insurance is the limit of incurred expense after which the insurer will start accepting the claims. Deductible ensures that the insurer can avoid minor and frequent claims. This is also to cover against the moral hazard of using insurance indiscriminately.
For example, if you have a health cover of Rs 5 lakh with a deductible of Rs 5000, the insurer will accept the claims if they are above this amount.
Thus, if you spent Rs 10,000 on a covered medical treatment, you will pay Rs 5000 and the insurer will pay Rs 5000. But if you spent only Rs 4999, or even Rs 5000, you will bear the entire amount.