You need car insurance – it’s the law, but as long as you have the minimum coverage required in your state, the rest of the decisions are up to you, including the amount of your deductible.
Knowing how to choose your deductible is important. It’s the amount of money you must pay if you file a claim. It’s not an optional payment, so knowing how to choose yours wisely is important.
What is an Auto Insurance Deductible?
Your auto insurance deductible is the portion of the costs of any damages to your car that you would owe before insurance covered anything. The average car insurance deductible is $500, but they can range from $100 – $2,000.
For example, if you have a $1,000 deductible, you’d be responsible for the first $1,000 in costs before your insurance company would cover anything. If the repairs cost, $900 for example, your insurance wouldn’t pay anything. You’d be 100% responsible for the entire amount.
Insurance deductibles apply when you are at fault for an accident and you file a claim for damages to yourself or your car.
How an Auto Insurance Deductible Affects your Premiums
Insurance premiums are based on your risk level. Insurance companies look at the riskiness of the type of car you drive, the type of driver you are, and even your credit score to determine your premiums. But they also consider the deductible you choose.
This is one area you have some control over with your premiums. The higher the deductible you take, the lower the premiums insurance providers charge.
Here’s why.
When you have a higher deductible, the risk for the insurance company decreases. You bear the responsibility for a larger portion of the damages. This means it’s less likely the insurance company will have to pay out and if they do, it will be a smaller amount.
If you choose a lower deductible, your insurance premiums increase because the risk of the insurance company paying out is higher.
How do you Choose an Auto Insurance Deductible?
You should give careful thought when choosing your auto insurance deductible. While lower premiums sound great, what happens if you are in an accident and need to pay for the damages? If your deductible is unaffordable, you could find yourself in financial trouble.
Before you choose the deductible, look at your savings and/or your ability to afford an unexpected expense. Say for example you took a $1,000 deductible. Look at your budget and savings account and see what it would be like to need $1,000 right now.
Could you do it or would it cause financial strain?
Choose the deductible that is the easiest for you to afford, while allowing you to have affordable premiums too. In other words, don’t take the lowest deductible and overpay in premiums, but also don’t choose the largest deductible and be unable to afford it.
What to Consider When Choosing a Deductible
Choosing your deductible is a big decision and everyone will have different answers. Here are some factors to consider when you’re choosing your deductible.
- How much money do you have saved?
Think of the worst-case scenario happening right now. How much could you afford to pay toward the damages? If you don’t have an emergency fund, you might want to keep your deductible as low as you can without making your premiums too expensive.
If you think you can save an emergency fund with at least as much as the deductible in the near future and keep it there, try it. But don’t get in over your head.
- Is your job stable?
If your job or career isn’t stable, consider sticking with a lower deductible. Why put yourself under stress if you can’t afford it because you suddenly lost your job? The last thing you need when you’re unemployed is to think about how you’ll cover an emergency. Pay the slightly higher premiums and get the insurance cover that will protect you no matter what.
- Is your car worth enough?
If you drive an older car, you might not have to worry about a deductible. You must carry liability insurance to follow the law, but you don’t have to carry comprehensive or collision insurance.
If your car is worth only a couple of thousand dollars, would it be worth it to invest $500 – $1,000 in it to have the insurance cover only $500 – $1,000 themselves? At that point, you might consider getting a new car and saving the money on the premiums without comprehensive or collision insurance.
- How much can you afford in monthly premiums? Your deductible directly affects your monthly premiums. A high deductible lowers your premium, and a low deductible increases it. Find a happy medium where you can afford the monthly premiums but know you can also cover the deductible should you file a claim.
- How much will you save with a higher deductible?
Don’t assume you’ll save money with a higher deductible. Get quotes for different deductibles and see how much you’ll save. For example, if the difference is $10 a month, that’s only $120 per year. It’s not worth taking the higher deductible since you aren’t saving much.
If the savings are much more than the deductible or at least make enough sense for your budget, then consider it.
When do Insurance Deductibles Apply?
Insurance deductibles don’t apply in all situations. For example, your liability insurance doesn’t have a deductible. Liability insurance covers the other cars, people, and property you might have damaged in an accident. Your insurance will cover those losses without any money from you.
Insurance coverages that do have a deductible include:
- Collision insurance – If you’re in an accident and you or your car are damaged, collision insurance will kick in after your deductible. This is the most common use of auto insurance and has a deductible you should choose carefully.
- Comprehensive insurance – If anything happens to your car other than an accident, the damages fall under comprehensive insurance. For example, if a tree fell on your car or your car was stolen, comprehensive insurance would cover it after you pay your deductible. While it’s not a required coverage if you couldn’t afford to replace your car if something happened to it, consider carrying it with an affordable deductible.
When do you Not Pay a Deductible?
There are some times that you won’t pay a deductible. While it’s never a good thing to be in an accident or have a tragedy, knowing that you don’t have to pay the deductible in all cases can be helpful.
Here are some situations a deductible may not be necessary.
- You aren’t at fault. If you didn’t cause the accident and the insurance company/police agree, the insurance company of the person at fault must cover the damages. You don’t have a deductible to pay since your insurance policy isn’t covering anything.
- You need your windshield repaired. Windshield repair is usually one repair that falls under comprehensive insurance that doesn’t require a deductible, although in some states a full replacement may require you to pay your deductible.
- You have to file a liability claim. You aren’t responsible for a deductible if you damage someone else’s car, person, or property but liability insurance has limits. Make sure you choose high enough limits to cover the worst that could happen, so you aren’t responsible for the remaining costs.
The Benefits of Taking a Higher Deductible
You might think it’s risky to take a higher deductible, but there are some benefits to consider.
- You save money monthly on your premiums.
If you take a higher deductible, your premiums will be lower. Instead of spending the difference, consider putting the money into a rainy-day fund to cover your deductible. For example, if you save $50 a month taking a higher deductible, put the $50 in your rainy-day fund and let it add up so you have the money to cover your deductible should you need it.
- You’ll be less likely to file claims.
While car insurance is meant to be used, filing too many claims can make you high risk and cause insurance companies to turn you down. With a higher deductible, you’ll be less likely to file a claim for the ‘little things.’
Key Takeaway
Choose the deductible that works best for your budget and gives you premiums you can afford. Your car insurance premiums are based on many factors, but your deductible is one area you have control over and can help your premiums increase or decrease based on what you can afford.
