Auto insurance deductibles are important factors in the cost of your policy and what you pay out-of-pocket when making a claim. Having the proper deductible can be a matter of balancing affordability with protection of your funds. In this piece, we will discuss how car insurance deductibles function, considerations for choosing one, and the effect they have on your premiums.
What Is an Auto Insurance Deductible?
A deductible is the portion of money that you pay up-front before your insurer pays for the rest of a claim’s cost. Deductibles exist with some coverage categories, including:
Collision coverage (for damage your car has caused in an accident)
Comprehensive coverage (theft, hurricane, tornadoes, vandals, etc.)
For instance, if you have a deductible of $500 and you make a claim for $2,000 in damages, you pay the first $500, and your insurance pays the next $1,500.
How Do Deductibles Impact Your Insurance Premiums?
Your deductible level directly affects your insurance premium (how much you pay for coverage). Usually:
Higher deductibles = Lower premiums (you assume more risk, so the insurance company charges you less).
Lower deductibles = Higher premiums (the company assumes more risk, so you pay more for protection).
For instance, opting for a $1,000 deductible over a $500 deductible can reduce your monthly premium, but you’ll have to pay more out of pocket if you make a claim.
Selecting the Right Deductible: Important Factors to Keep in Mind
When choosing a deductible, keep the following in mind:
- Your Financial Situation
Are you willing and able to pay a higher deductible in the event of an accident?
If it would be hard to pay for an emergency expense, a lower deductible might be the way to go.
- Your Driving Practices and Risk Level
If you don’t drive very much or have a good driving record, paying a higher deductible might save you money in the long run.
If you commute in high-traffic areas or in extreme weather patterns often, a lower deductible may be wiser.
- Your Car’s Value
If your vehicle is older and low in market value, it may not be cost-sensible to pay for comprehensive or collision coverage with a low deductible.
If you have a newer or high-value vehicle, maintaining a lower deductible can safeguard your investment.
- Loan or Lease Requirements
If you lease or have an auto loan, your lender might have a particular deductible amount that you are required to have.
Consult with your financing company prior to making any changes to your policy.
When Do You Want to Change Your Deductible?
There are instances when it is wise to change your deductible:
If you have an emergency fund and can afford a higher deductible, raise it to reduce your premiums.
If your situation financially changes and you require less out-of-pocket expense, a lower deductible may be the better option.
If your car appreciates greatly, decreasing coverage and changing the deductible can save money.
Typical Deductible Amounts and Their Effect
Deductible Amount
Monthly Premium Effect
Out-of-Pocket Expense per Claim
$250
Highest Premium
Lowest Cost at Claim
$500
Moderate Premium
Standard Cost at Claim
$1,000
Lower Premium
Higher Cost at Claim
$2,000
Lowest Premium
Highest Cost at Claim
Conclusion
Selecting the appropriate auto insurance deductible is a matter of personal choice depending on your finances, driving record, and risk acceptance. A higher deductible will lower your premiums, but you will have to pay more out of pocket in the event of an accident. Conversely, a lower deductible offers financial protection, but at the cost of higher premiums.
Assess your financial position, take into account your driving risk, and speak with your insurance company to get the optimal combination of affordability and coverage.