High deductibles offer drivers the lowest monthly out-of-pocket payments for their premiums…but does paying more on the back end in the event of a claim make the best financial sense?
It’s hard to imagine why someone wouldn’t choose a high deductible to keep their monthly insurance payment low. With a little luck and some careful driving, you probably won’t ever make a claim anyway, right? Unfortunately, accidents do happen, and a high deductible may be like salt in the wound after a costly accident. If you do choose high-deductible car insurance, make sure you know why you’re making this choice and how a high deductible affects you—both in terms of monthly premiums and when making a claim.
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What’s a Car Insurance Deductible?
Wouldn’t it be grand if your monthly car insurance bill took care of everything in the event of an accident? Alas, it doesn’t work like that. When you have car insurance, you pay a monthly bill, or premium, and you are subject to paying a specific dollar amount of the bill should you make a claim. That dollar amount is called a car insurance deductible. Car insurance deductibles can range from hundreds to thousands of dollars, and the amount is your choice to make.
How do deductibles work?
Deductibles and your monthly insurance premium costs are linked—the higher your deductible, the lower your monthly insurance premium. A lower deductible calls for a higher premium. It’s like a seesaw. As one goes up, the other goes down.
Different deductibles also correspond to the different types of coverages that you can have. Comprehensive coverage and collision coverage require the insured to choose a deductible amount (although the amount selected for the comprehensive deductible and the collision deductible can be the same). Uninsured property damage coverage is another type of coverage that calls for a deductible. Personal Injury Protection (PIP) and liability coverage (which covers bodily injury and pays for a party’s medical bills) do not usually require a deductible. Thank goodness, because those bills can be sky high! If you need to brush up on the different car insurance coverage types and what they mean, you can review what each type of car insurance covers here.
But let’s get back to our auto insurance deductible:
Let’s say that you have an accident and the damage to your car is $2,000. And let’s say that when you purchased insurance, you selected a $1,000 deductible to keep your monthly and annual premiums low. When you file a claim with the insurance company, you are responsible for paying the deductible of $1,000 before the insurance company kicks in $1,000 to cover the remainder of the claim (or any amount up to your policy’s coverage limit). That’s the way a deductible works. You pay first, and your insurance company pays second. If a $1,000 deductible seems too steep, you can lower that to $250. But you’ll be spending a higher monthly premium instead. Basically, the insurance carrier will collect your money on the front end or the back to cover the global cost of insurance claims. You get to choose where you want to pay the higher amount.
What Are the Pros and Cons of High Deductible Car Insurance?
The first and most apparent benefit of high-deductible car insurance is that it means that you have a lower monthly car insurance policy payment. And, if you never make a claim, you never have to pay the cost of that high deductible that you signed up for. But how willing are you to assume that you will not make a claim this year or in the future? How willing are you to bet that you will have that high deductible dollar amount in hand when the time comes? Choosing a high deductible may hint that you have a higher tolerance for risk. Is that you?
Another reason some people go for a high deductible is to trick their brains into not making a claim in the first place. Making claims, as you know, can raise your car insurance premiums. Therefore, choosing a high deductible is a tactic that some people use to keep themselves in check and make sure they only pay out of pocket every time for incurred auto expenses. That way, they can avoid making claims in the first place.
Finally, another advantage of high deductible car insurance is that you can use your monthly insurance premium savings to build an emergency fund for your future car costs and other out-of-pocket expenses.
Now, a look at the cons:
High-deductible car insurance means that you’ll be paying out more of your own money when making a claim than you would have if you had chosen a lower deductible (and inversely, paid more monthly in car insurance rates). Most people budget for their monthly insurance premiums but tend to forget about the money they might need should a deductible be due. If you aren’t mindful of the deductible and have an accident, you may be stuck with a damaged or out-of-commission vehicle until you can come up with the deductible amount. Another negative of a high deductible is the inability to predict the cost of an accident. Let’s say that you have a $1,000 deductible, but the damage is $1,500. You’ll have to pay $1,000 to get the $500 the insurance company owes you. That’s a hard pill to swallow when a lower deductible (let’s say $500) would have saved you $500.
Finally, a reason not to have high-deductible car insurance is if you lease your car. If your vehicle is a lease or loan, that means a bank or other third party lender has a vested interest in it. In the event that your car needs to be repaired, the bank or lender may demand that is repaired correctly by a trusted body shop or a qualified mechanic. So if you’re not prepared to pay top dollar in such a scenario, consider a lower deductible.
FAQ: High Deductible Car Insurance
How high should I make my car insurance deductible?
Before you consider how high a deductible you should have, you should consider the following: How much cash will you have on hand for out-of-pocket expenses in the event of an accident? Does a higher monthly premium that allows you to pay less on a claim appeal to you? How likely are you to make a claim, depending on your driving skills, driving routes, and driving frequency? Remember that if you have both comprehensive insurance and collision coverage, you can choose to raise your deductible on one and not the other. Because car accidents are avoidable in a sense, and theft, vandalism, and disasters (which comprehensive insures) are not, some suggest that you raise your deductible on collision coverage alone. Age, driving record, and even the type of car you drive can also be a factor in how much you can benefit from a higher deductible.
What’s the point of car insurance if my deductible is too high?
Exactly, right? First of all, my friend, you can’t go without car insurance in most states. It’s illegal. And if you lease a car, you aren’t driving it off the lot until you have some. We can’t always control an accident’s circumstances, and as high as the deductible may seem now, it’s a lot better than having to pay for a major accident yourself. Remember, there are ways to lower your deductible if you are comfortable paying a higher monthly premium.
Where can I compare cheap car insurance quotes online?
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Conclusion: Compare high-deductible car insurance quotes here
If you are looking to lower your car insurance premium by selecting a high deductible, compare those high-deductible car insurance quotes at insurify.com, where you can compare quotes from hundreds of national and regional car insurance companies in minutes. Start with only your ZIP code and finish with a complete quote that is customized to you. The more information you enter, the more accurate insurify.com can make your quote!
For more information on choosing your car insurance deductible, read How to Make Choosing the Right Car Insurance Deductible Easy.