Car insurance deductibles can be viewed in two ways:
- A way for insurers to wring more money out of you if you have an accident.
- A way to lower your insurance premium.
Both are correct. However, the second one is just one way that car insurance deductibles can be used to a policy holder’s advantage.
What is a Deductible?
The two main costs to compare when shopping for the best cheap car insurance companies are the policy premium and the deductible.
The deductible amount affects the premium, as we’ll explain later.
The premium is the cost paid to an insurance company for providing the policy. It’s paid once per year, or however long the term is, to maintain the policy.
The deductible is an amount you only pay if you have an approved insurance claim. If your car is hit by another car, then you’d pay the deductible out of your pocket for repairs before the insurer pays the rest of the repair costs.
Different Deductibles Change Your Costs
Low, medium, and high deductible policies exist, making high deductible policies more affordable in the short term than low ones.
Suppose you were in an accident that caused $3,000 in damage to your car. If your deductible is $250 and your claim approved, you’d pay $250 toward repairs, and the insurance would pay the remaining $2,750.
If your deductible was $1,000 in the same case, you’d pay that much toward repairs, and the insurer would pay $2,000.
Whatever deductible you choose, you set it up with your insurance provider before signing your policy. It isn’t something you can change when you get in an accident.
Deductibles average $500 for most drivers. Policies can also be bought with $250, $500, $1,000 or $2,000 deductible. The higher your deductible, the lower the premium is.
Different Types of Insurance Deductibles
Liability, collision, and comprehensive are the three main types of auto insurance coverage. Only two of them, collision and comprehensive, allow deductibles. Liability coverage doesn’t.
Collision protects you if you run into something. It doesn’t matter what you hit: if you run into something, your collision deductible must be paid. You could hit a car, house, tree, guardrail, or side of an office building.
Comprehensive insurance covers gaps left by your collision insurance, such as if your vehicle is damaged outside of collisions. This includes vandalism, theft, or weather-related issues. You’re covered if you’re at fault or not for the damage.
You must first pay the comprehensive deductible before your insurer picks up the rest of the tab.
How to Choose a Car Insurance Deductible
The most significant factor in deciding on a car insurance deductible is if you want a higher deductible to get a lower insurance premium.
That’s the real issue in all of this. Do you want to pay less now for the premium in the hope that you won’t get into an accident and need to pay a deductible?
A high deductible lowers a premium a lot more than a low deductible does, so is it worth paying more later in out-of-pocket expenses if you get in an accident and your car needs to get repaired?
And if the repair costs less than the deductible, then you’ll pay all of them.
A lower deductible will raise your car insurance bill each month, but your out-of-pocket expenses will be lower if you get in an accident.
That’s going on the assumption that you’ll make insurance claims. If you haven’t gotten into an accident in years, you may want to take the risk of paying a higher deductible later while getting a break on your premium.
If, however, you’ve had a few too many accidents over the years, then a low deductible can make more sense.
What Deductible Can You Afford?
It’s important to choose a deductible you can afford to pay if you get in an accident. If $500 puts a significant strain on your finances, then opt for a lower deductible.
A high deductible will save you money each month on your auto policy premium, but that won’t be of much value if you can’t afford a deductible for car repairs to keep your car running.
Whatever amount deductible you choose, try to put that money aside in a savings account if you need it in the coming year. That way, you won’t have to try to scrape together $500 or however much you need to pay for repairs before your insurer kicks in its share.
When You Don’t Have to Pay a Deductible
There are some instances when you aren’t required to pay your deductible.
If another driver is at fault for hitting you and they’re insured, you aren’t responsible for paying a deductible.
The claim is against their insurance, not yours. The deductible only applies when claiming damages to your car with your insurance company. The other driver’s insurance will pay for the repairs, and that person pays their own deductible.
A big if here, however, is if the other driver is uninsured or underinsured. In those cases, you would be responsible for paying your deductible for having your car repaired.
If you’re in an accident that is your fault and you decide not to get your car repaired, then you don’t have to pay a deductible.
You may choose to do this if your car can still run but has cosmetic damage. Your insurer would send you a check for its estimate of the damages, minus your deductible. If you don’t get the repairs done, you can still keep the money from the claim.
Rose Rosie is a writer for the personal finance website, Joy Wallet, which provides readers with useful information, resources, and tools to help maximize their financial fitness.