Whether you are seeking auto, home or health insurance, a deductible is a standard part of the policy. A deductible is the amount of out-of-pocket expenses a policyholder must incur before the insurance will pay. Before the deductible is met, you are responsible for expenses. Probability, which is the likelihood that a claim-producing event, is a factor that can impact your insurance policy. Most insurance companies offer standard deductibles, however the premium can vary based on the probability of a claim.
Step 1
Identify hazards. Potential hazards increase the probability or magnitude of a claim-paying event. Possible hazards include being a smoker when trying to obtain heath insurance or poor wiring found on a homeowner's insurance inspection.
Step 2
Assign numbers to random variables. The first random variable, known as frequency of loss, is the number of projected losses in a specified period of time. For example, a healthy hospital insurance policyholder is expected to have no losses within the year and some in the future. Your health and driving record can impact the frequency of loss. This variable can be difficult for you to determine. Odds are often based on the general population.
Step 3
Calculate the amount of loss. The second random variable is the cost of a potential loss. When calculating car insurance, the replacement cost of a car is the variable. For health insurance, the cost of hospitalization would be considered a variable.
Step 4
Convert percentages to decimals. If there is a 50 percent chance you will have no accidents in a given year, the frequency of loss will be .5.
Step 5
Multiply the amount of expect repairs by the frequency of loss. If there is a 50 percent chance there will be no loss, the result is 0.
Step 6
Add the variables together to determine the average amount the insurance company can expect to pay in a year. If there is a 10 percent chance claims will reach $15,000, a 20 percent change claims will be at 500, and a 50 percent chance there will be no claims, the average is $1,600.
Step 7
Know that selecting a higher deductible typically results in a lower premium and vice versa. Depending on the policy, the deductible may apply per incident or per year.
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