Insurance policies make for incredibly dull reading, so you probably haven't read yours from front to back. If for some reason you ever do (like insomnia), you may find several mentions of an insurance retention. A retention is the amount of your loss that you pay. A retention is essentially a deductible, but there is a slight technical difference between the two.
TL;DR (Too Long; Didn't Read)
People commonly associate retentions with deductibles. Both of these entities are sums of money that must be paid by an individual before insurance steps in to offer financial support.
Retention Versus Deductible
The deductible is a common insurance term that most people are familiar with. When you file a claim with your insurance company, the deductible is the amount of money you have to pay out of pocket. Once you've reached your deductible, your insurance kicks in and pays the rest of the bill as per the terms of your policy. A retention is essentially the same thing. It's the amount of the loss you pay or retain yourself. The words retention and deductible are often used interchangeably, but there is a slight difference between them.
Technically, retentions get paid first. Your insurance company expects you to pay this amount before they pay a dime. If your policy has a deductible, however, the insurance company pays the entire claim and then sends you a bill for the amount of your deductible. You pay a retention up front, whereas you reimburse your insurance company for the deductible.
Because people more readily understand the term deductible, many companies use it when they strictly mean a retention. Your health insurance policy, for instance, probably makes you pay your deductible before they pay anything. In this case, what people call a deductible is actually a retention.
Why Retentions Exist
Perhaps you've wondered why retentions and deductibles exist. You pay good money for your insurance premiums, so it may seem unfair that you also have to cover part of any loss yourself. There are several reasons why insurers do this. One reason is to combat insurance fraud and carelessness. If you have to pay some of the loss yourself, you're much more likely to exercise caution and try to avoid filing a claim. If you don't have a horse in the race, you're more likely to have a cavalier attitude toward the outcome.
Deductibles and retentions also make insurance less expensive for everyone. Increasing the amount of your retention makes your insurance premium go down. The more money you pay, the less your insurance will have to. This break is passed on to you in the form of lower premiums. The overall price of insurance goes down under this system, as well. If the amount of your claim is less than your retention amount, it makes sense to pay for the loss yourself rather than running it through your insurance.
As a result, fewer nuisance claims get filed and processed. Processing a claim takes time and money, even when the insurance company ultimately denies the claim. Reducing the amount of frivolous paperwork and expense helps keep insurance costs down for everyone.
Michelle earned her accounting degree summa cum laude and has extensive experience in business management and accounting. Entrepreneurship is in her blood, and her work focuses on helping small businesses successfully compete in a big market. Michelle also knows the value of a dollar and enjoys helping readers understand how best to maximize their money and enjoy a healthy financial life. Her work appears Chron's small business site. She has also worked on small business blogs for a national insurance chain.