How Insurance Works

• How your insurance company processes claims likely depends on the type of insurance, but usually a deductible is involved. In an automobile accident for which you are at fault, for example, your insurance company will typically pay for the entirety of the damages except for the amount of your deductible, for which you will be responsible. In some cases, you won't recover anything: If your deductible is $500 and the damages are only $300, you will have to pay the entire $300 yourself.
  
  

Deductibles and Insurance Costs

• Deductibles exist for several reasons. First, from the insurance company's perspective, a deductible discourages people from incurring (and sometimes reporting) claims. A driver who knows that an accident will cost him up to $500 may be more careful. Additionally, having a higher deductible can help lower insurance costs. If a homeowner must pay a higher percentage of any potential loss, the insurance company faces lower out-of-pocket costs for each claim and can lower the amount it collects in premiums.
  
  

Deciding Whether to File a Claim

• Because insurance companies may raise premiums for those who make one or more claims, policyholders must decide whether to make a claim when the deductible may exceed the total expected damages. For example, if your deductible is $500 and you have an item stolen from your home that is worth only $400, you won't receive any money from the insurance company. Thus you may not to want to make a claim that may lead to higher future premiums.
  
  

Potential Pitfalls

• There are dangers to not filing a valid insurance claim. For automobiles, there may be laws requiring that incidents be reported in certain circumstances. Additionally, what at first seems like a minor accident or theft may eventually turn out to be far more costly than first anticipated. For example, a minor car accident may become serious when the other driver later claims to be suffering from an injury: Making a timely claim can ensure that you are covered for any situation.