Premiums, deductibles and limits, explained simply
The premium is what you pay to hold the policy. The deductible is what you pay yourself before the insurer contributes to a claim. The limit is the most the insurer will ever pay. You pay the premium every year whether you claim or not.
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Strip the paperwork off any insurance policy and you find four numbers and a list. Understand the four numbers and you can compare policies in about a minute. Read the list and you'll know what you actually bought.
Premium vs deductible: what each number does
Premium. What you pay for the promise. It's the price of the policy, not a deposit toward claims — spend a year claim-free and it's gone.
Deductible (or excess). What you absorb before the insurer contributes. Raising it lowers your premium, because you've agreed to eat more of each loss.
Limit. The most the insurer will pay. Above it, you're uninsured again. Limits can be per claim, per year, or per category, and the sub-limits are where policies quietly diverge.
Health plans run the same machinery under their own vocabulary — see what “covered” means in health insurance.
Coinsurance. Your percentage share above the deductible, where the policy uses one. This is what turns a manageable claim into a painful one.
Insurance claim example: premium, deductible and limit
Illustrative: a $20,000 loss on a policy with a $1,000 deductible, 10% coinsurance and a $15,000 limit.
| Step | Amount | Who pays |
|---|---|---|
| Deductible | $1,000 | You |
| 10% coinsurance on the remaining $19,000 | $1,900 | You |
| Insurer's 90% share, capped at the limit | $15,000 | Insurer |
| Left over above the limit | $2,100 | You |
Total to you: $5,000 on a $20,000 loss, from a policy that felt like it covered you. The limit did more damage than the deductible, and the limit is the number nobody checks.
Why is one policy cheaper than another?
Insurers price risk for a living. A materially cheaper policy is almost never the same cover sold at a discount — something has been adjusted, and it's usually one of:
- A higher deductible, so you carry more of every claim.
- A lower limit or a tight sub-limit on the thing most likely to go wrong.
- A longer exclusion list.
- A narrower definition of the covered event.
- Slower or more adversarial claims handling, which doesn't appear on any comparison table.
Insurance exclusions: what is not covered
Exclusions decide claims. The numbers only decide the arithmetic once a claim is accepted. Read for:
- Wear and tear. Almost universally excluded. Insurance covers sudden events, not the passage of time.
- Pre-existing conditions or damage. However that gets defined, and it's usually defined broadly.
- Named perils vs all risks. A named-perils policy covers only what it lists. All-risks covers everything except what it excludes. That inversion is the single biggest difference between two policies at the same price.
- Conditions precedent. Obligations on you — fit the lock, service the boiler, report within N days. Break one and a valid claim can be refused.
Premium and deductible FAQs
Should I choose a higher deductible for a lower premium?
It's a reasonable trade if you could comfortably absorb the deductible tomorrow. If paying it would mean borrowing, the cheaper premium is a false economy.
What is the difference between a limit and a sub-limit?
The limit caps the whole policy. A sub-limit caps one category within it, and is often far lower than people expect for high-value items.
Does a claim-free year mean I wasted the premium?
No. You bought the transfer of risk for that year. The premium purchases certainty, not a future payout.
What is the most commonly overlooked number?
The limit. Buyers compare premiums and deductibles closely and rarely check whether the ceiling would actually cover their worst realistic loss.