03/29/2022
HOW TO CHOOSE YOUR CAR INSURANCE DEDUCTIBLE
Choosing the best car insurance deductible isnât easy. However, selecting a deductible is one of the most important things to consider when buying coverage.
WHAT IS A CAR INSURANCE DEDUCTIBLE?
Letâs cover the basics of what a car insurance deductible is and how it works.
If you file a car insurance claim after an incident, the deductible is the amount you pay out of pocket before your insurance carrier starts paying for repairs. You will have to pay the deductible each time you file a claim.
For example, if you have a $3,000 repair and a $1,000 car insurance deductible, you would be responsible for paying $1,000. After paying the deductible, the insurance company would pay the remaining $2,000. However, if the repair costs less than the deductible, youâll pay the entire bill.
Not all types of insurance coverage have a deductible attached to them. In general, deductibles apply to collision, comprehensive, uninsured/underinsured motorist, and personal injury protection.
HOW DOES A DEDUCTIBLE WORK?
You get to choose your deductible when you buy your policy. Policies with lower deductibles have higher premiums but lower out-of-pocket costs if you file a claim. And policies with higher deductibles have lower premiums but higher out-of-pocket costs if you file a claim.
When you file a claim with the insurance company, you pay the deductible. The carrier covers costs that exceed the deductible amount.
6 STEPS TO CHOOSING A DEDUCTIBLE
When selecting a car insurance deductible, follow these six steps to find out which amount is best for you.
1) Choose a High or Low Deductible
There is a fairly straightforward relationship between your insurance deductible and the rate you pay for your policy. Plans with lower deductibles usually have higher monthly premiums and vice versa. But if you choose a plan with a higher deductible to get a lower rate, youâll pay more out of pocket if you file a claim.
> Low Deductible:
Better if you want to avoid a large bill after filing a claim, but your monthly rates will be higher
> High Deductible:
Better if you want lower monthly costs, but if you file a claim, youâll pay more out of pocket
2) Calculate the Cost Difference
When comparing auto insurance policies, looking at the difference in price between plans with high and low deductibles is a good place to start. But your total cost will vary based on whether you file a claim. So, itâs a good idea to run a few different calculations and compare your out-of-pocket expenses if you file no claims, one claim, or two claims.
In the hypothetical scenario below, the driver would save $1,116 per year if they had a high-deductible policy and didnât file any claims. But if the driver filed two claims that year, a low-deductible plan would save them $384 in out-of-pocket costs.
> Low Deductible:
$250 deductible plan for $182 per month
Annual Cost with No Claims $2,184
Annual Cost with 1 Claim: $2,434
Annual Cost with 2 Claims: $2,684
> High Deductible:
$1,000 deductible plan for $89 per month
Annual Cost with No Accidents: $1,068
Annual Cost with 1 Claim: $2,068
Annual Cost with 2 Claims: $3,068
3) Are You Likely to File a Claim?
In general, drivers who are more likely to file an auto insurance claim will have lower total costs with a low-deductible car insurance plan. Conversely, drivers who donât file a claim will typically save with a higher deductible plan. However, when you opt for a plan with a higher deductible, youâre betting that you wonât have an accident.
When considering the likelihood of filing a claim, ask yourself if you have a history of car accidents or engage in high-risk driving behaviors such as speeding or rush-hour driving.
> Low Deductible:
Better if youâre MORE likely to have a car accident
> High Deductible:
Better if youâre LESS likely to have a car accident
4) Determine the Value of Your Car
Depending on where you live, most insurance companies will only pay up to the actual cash value of your vehicle if the insurer declares it a total loss. So, itâs generally better to have a lower deductible if your carâs not worth much.
For example, letâs say your vehicleâs worth $1,500 and you have a $1,000 deductible on your insurance policy. If your car is totaled, the insurer will only pay $500 after you cover the deductible.
On the flip side, if your carâs worth $10,000 and you have a $1,000 deductible, the insurance company will pay $9,000. So, having a higher deductible makes more sense.
You will need to calculate how much your car is worth. Then compare its value to your insurance policy costs. And remember, you donât have to choose the same deductible for every type of coverage you have. An insurance agent may be able to help you mix and match deductible amounts based on your carâs value and the risks you face.
> Low Deductible:
Better for CHEAPER cars
> High Deductible:
Better for more EXPENSIVE cars
5) Evaluate Your Cash Savings
If you do get into a car accident, youâll have to pay your deductible before the insurance company starts chipping in for repairs.
If you donât have savings or an emergency fund to cover a high deductible, it may be better to choose a low-deductible policy. The higher monthly bills for insurance premiums may be a better way to protect your finances if you have an accident.
> Low Deductible:
Better for those who want to avoid a large, unexpected bill after an accident
> High Deductible:
Better for those who have savings to cover the deductible after an accident
6) What's Your Tolerance for Risk?
Choosing a high-deductible plan is a gamble that you wonât have a car accident. If you do have an accident with a high-deductible policy, youâre still covered. But youâll pay more out of pocket after the accident than if you had a low-deductible policy.
> Low Deductible:
Better for risk-averse people
> High Deductible:
Better for those who are comfortable taking a risk they wonât have to file a claim
A High Deductible Policy is Good for Those:
>Less likely to have a car accident or file a claim
>With an emergency fund to cover a large repair bill if needed
>Needing to cover a more expensive car
>More comfortable with risk
A Low Deductible Policy is Better for Those:
>More likely to file a car insurance claim
>Owning a lower-value car
>Without savings to cover a large unexpected bill
>Risk-averse -- meaning, disinclined or reluctant to take risks
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