Your deductible = the dollar amount deducted from your insured loss.  Determining which deductible you should choose can be a difficult decision.  One way to save money on your auto policy is to increase the deductible.  The higher the deductible, the lower the premium.  This is because the consumer is assuming a portion of the total cost of a claim.  Keep in mind, the deductible amount will come out of the policyholder’s pocket in the event of a claim – which could overshadow the premium savings in a higher deductible.  If you are in an accident and your deductible is $500, your insurance company will pay for the repair to your vehicle on a covered loss – less the $500 deductible.  You’ll typically pay your deductible directly to the auto repair shop after they complete the repairs.  Your insurance company will deduct your portion from the total they send to the repair shop.  You’ll be expected to pay the $500. 

Conversely, a low deductible will increase your insurance premium payments.  If the policyholder does not have an at-fault accident resulting in a claim, that individual has paid more for auto insurance than someone with a higher deductible. 

How does a deductible work?

Imagine your vehicle is damaged.  First step is determining whether it will be filed under your comprehensive or collision coverage.  For this example, a tree branch falls on your car and causes damage.  You file a claim on your comprehensive coverage and the repair shop estimates it will cost $1,000 to fix your car.  What you pay depends on your deductible:

If your deductible is…You payYour insurance pays 
$250$250$750
$500$500$500
$1,000$1,000$0

Here are five questions to help you choose the right car insurance deductible:

  1. 1. How do different deductible levels affect the insurance premium?

No two insurance companies will have the same deductible-premium ratio, and each state will differ on their regulatory approach to the subject.  Generally, increasing the deductible from $200 to $500 could potentially reduce collision and comprehensive premiums by 15%-30%.  Conversely, increasing the deductible to $1,000 may save you 40% or more. 

2. Is it better financially to have a low deductible and higher premium?

That depends.  Someone with a low deductible and higher premium ratio can go through a 10-year period without filing an insurance claim.  If that’s the case, that person will end up having paid more money over that time in total premium than someone who selected a higher deductible.  Alternatively, a person can end up filing several insurance claims in a few years. 

3. What is the value of your vehicle?

Figuring out how much your vehicle is worth to your insurance company can help you decide on a deductible.  Weigh the value of the car against the cost of potential repairs.  As the car ages and the value comes down, the chance of a total loss goes up – meaning it may not be worth buying optional coverages.  Due to the current shortage of used vehicles, may want to consider how important your car is as a means of transportation.  If you would not be able to get to work without your vehicle, you may want to continue carrying comprehensive or collision coverage to pay for repairs.  Additionally, if you would not be able to afford replacing your vehicle in the event of a loss (without insurance paying above your deductible), you will want to carry comprehensive and collision insurance. 

4. What does your emergency fund look like?

Accepting a higher deductible in exchange for a lower annual premium is a common way to save money on insurance.  But, I caution you to think carefully about how much you could pay out of pocket to repair your car.  Would you be able to come up with $1,000 on the spot for repairs?  I caution my clients when selecting a high deductible to be sure you have that money saved in your emergency fund, set aside to use in the event of a claim.  If you know that money will be there if needed, you can rest assured that you can accept the risk of a higher deductible (and in turn a lower premium).  If you aren’t sure you could come up with the cash right away when you need it, you may prefer the peace of mind of a lower deductible. 

5. How does a person’s driving affect the choice of deductible?

The current thinking is the cleaner the driving record, the greater the consideration one should give to a higher deductible, as it will lower the premiums.  On the other hand, for someone without a clean driving record, that person should consider taking a lower deductible, despite the additional premium.  Often times you will find that if you don’t have a clean driving record, the higher deductible you choose the bigger savings you will find.  Many of the insurance companies I represent offer programs that reward safe driving.  Considering a vanishing deductible program allows you to earn $100 off your deductible for every year of safe driving. 

The bottom line is that choosing the right deductible takes time and careful consideration.  As a specialized agent, I can help you make the best decision based on your driving record, current finances, credit score, and your overall financial planning goals.  When providing an insurance review, I offer multiple deductible options, so that you have the information to decide on a deductible that you are comfortable with. 

If you’re looking for an agent who will take the time to provide multiple options, email me at kate@fdinsurancegroup.com

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