A car insurance deductible is an amount deducted from an insured loss, meaning the sum that an individual must personally pay for repairs or replacement after an accident. For instance, if you have a fender bender and the total repair cost is $1,000, while your insurance company covers $800, your deductible would be $200.1 Determining the appropriate deductible can be a challenging decision for many consumers.
How does a car insurance deductible work?
Conventional car insurance policies typically require consumers to choose a deductible for comprehensive coverage and a separate deductible for collision coverage, although they might be the same amount. Liability coverage, however, does not involve a deductible.
Comprehensive coverage protects your vehicle from non-collision-related damage and theft. In the event of a claim for such damage, your deductible applies, but there are certain instances where you may not need to pay it. For instance, in some states, your insurance company might fully cover cracks or chips in your windshield.
Collision coverage pays for damages to your vehicle resulting from a collision with an object when you are at fault. Any claim you file for collision coverage will be subject to a collision deductible.1
The impact of the deductible on insurance premiums:
The higher the deductible you choose, the lower your annual, biannual, or monthly insurance premiums might be, as you are taking on a portion of the total claim cost. However, it’s essential to keep in mind that the deductible amount will come out of your pocket in the event of an at-fault car accident, potentially offsetting the premium savings.
On the other hand, opting for a low deductible will lead to higher premium payments. If you don’t have an at-fault accident resulting in a claim, you might end up paying more for automobile insurance compared to someone with a higher deductible.
When do you pay the deductible for car insurance?
In most cases, you are responsible for paying the auto insurance deductible. However, there are exceptions. If you are in an accident where another driver is at fault, you don’t have to pay the deductible. Similarly, if you file a claim covered under liability insurance, which covers injuries and property damage for accidents you are at fault for, you won’t have to pay the deductible. This is valid as long as the costs fall within the coverage range you purchased. Additionally, some insurance policies offer a diminishing deductible, reducing the deductible amount each year that you remain accident-free.
Choosing the right car insurance deductible:
When selecting a deductible, consider your comfort level with higher out-of-pocket costs versus monthly expenses. A high deductible will lower your overall insurance rate, but it will increase your out-of-pocket expenses if you need to file a claim.1
Here are five questions to help you make the right decision:
How do different deductible levels affect the insurance premium?
The deductible-premium ratio varies among insurance companies and states. Generally, increasing the deductible from $200 to $500 may reduce collision and comprehensive coverage premium costs by 15% to 30%, while raising it to $1,000 could save 40% or more.
What’s the downside of a high deductible?
A high deductible might result in significant out-of-pocket expenses after an accident. For example, if a car owner with an $800 damage cost has a $1,000 deductible, they would pay $800 themselves. However, with a $100 deductible, the out-of-pocket expense would only be $100, saving $700.
Is it better financially to have a low deductible and a higher premium?
The answer depends on various factors, including your claims history. If you have a clean driving record and go several years without filing a claim, opting for a higher deductible and lower premium might be financially beneficial. However, if you have a less-than-clean driving record and anticipate filing claims, a lower deductible might be more suitable.
How does a person’s driving record affect the choice of deductible?
Drivers with clean records are generally encouraged to choose a higher deductible to lower their premiums. In contrast, those with less-than-perfect records might benefit from a lower deductible despite the higher premiums. Additionally, some insurance providers offer programs that reward safe driving with decreasing deductibles over time.
Do you have the financial means to pay a high deductible if necessary?
Consider your current financial situation and whether you could afford to pay the high deductible in the event of an accident. Creating an emergency fund to cover the higher deductible before opting for it is a prudent practice.
Ultimately, selecting the right deductible requires careful consideration. Consulting with an experienced insurance agent can be beneficial, as they can help you make an informed decision based on your driving record, financial status, credit history, and overall financial planning goals.
To learn more about car insurance and how it can protect your vehicle, visit Hozone Fly.