How much could you save on your car insurance?
It’s the subject of every auto insurance commercial, but it’s a good question. In 2019, the average annual premium was $1,548 per year or $129 per month. Apart from safe driving and zero claims, one of the simplest ways to lower your car insurance premium is to increase your deductible.
What is a car insurance deductible, and how does it work? Keep reading to learn more about car insurance deductibles.
What is Car Insurance Deductible?
An insurance deductible is an amount you owe in cash when you make a claim.
Your deductible will never be a surprise. You agree to a deductible when you sign up for an insurance policy. Your agent will tell you, and you can find the number in your policy paperwork.
Deductibles range from $250 to $2,000 – or even higher. Typically, insurance policies with high deductibles have cheaper premiums than policies with low deductibles.
Because you need to pay the deductible when you make a claim, it’s essential to choose an amount that you can afford to pay upfront in cash (or by credit card).
What Types of Deductibles Are There?
Your deductible will be one of two types: collision or comprehensive.
The collision deductible covers you if you get into a collision with anything – a vehicle, a house, or anything else.
Your comprehensive deductible kicks in at every other opportunity. If your car is stolen, vandalized, or damaged in a storm or natural disaster, then you pay the comprehensive deductible.
In addition to these deductibles covering two different instances, there are two types of coverage depending on your state. A comprehensive deductible covers you in all circumstances. However, you may not get the benefit of your collision protection if you were deemed at fault.
How Do Car Insurance Deductibles Work?
Car insurance deductibles are your “out of pocket” costs after an accident or in the event your car is stolen.
It serves to put a cap on the amount you owe in cash while also limiting the amount the insurance company pays out.
So how does it work?
Let’s say you have a $1,000 deductible. However, you got into an accident and did $1,500 in damage to your car. When you submit a claim, and it gets approved, you pay $1,000. Then, your insurer cuts a check for $500.
If your accident costs $750, then you will pay that upfront. Your deductible is too high, and your damage is too inexpensive for your insurance to pay. You will then have $250 left for the year in case you need to claim again. Though, it’s a good idea to limit claims where you can as it can increase your premiums.
How Do You Choose Your Insurance Deductible?
So, do you choose a higher deductible to save on insurance premiums? Or do you choose the lowest available deductible to minimize out of pocket costs?
This is the dilemma everyone faces. But there are a few ways to parse the issue before buying auto insurance.
Do You Drive Every Day?
First, consider how much you drive and the likelihood you’ll need to claim. If you commute regularly, park in an unsecured space, or allow new young drivers to practice with your car, then you might benefit from a higher premium or lower deductible.
Almost 20% of drivers with insurance will need to make a claim that requires them to meet their deductible. You should carefully consider whether you’re likely to be in that number.
If you don’t have a long commute or you drive your vehicle only semi-regularly, you might be fine with a higher deductible.
How Much Can You Afford Upfront?
Another critical point to consider is whether you have the cash to pay your deductible if you need to.
Some people find it easier to pay an extra $50 a month in premiums than to save for and pay $1,000 or $2,000 as a deductible. If you tend to live paycheck-to-paycheck with little room to spare, then you might be better with a lower deductible and a slightly higher premium.
Can You Escape Your Car Insurance Deductible?
Is there ever a scenario in which you don’t need to pay your deductible?
Yes, there are two occasions when your deductible doesn’t come into play.
The first and most straightforward is when you choose not to repair your car or when you repair your vehicle without making a claim. If there’s no claim, then there’s no issue with the deductible.
Another scenario includes a collision where the other driver is at fault, and you live in an “at fault” state. If the other driver hits you and has insurance, then you claim against their insurance. Your insurance deductible only applies when you are at fault.
If you live in a no-fault state, then you will almost always pay your deductible because you claim against your insurance first.
The simplest way to think about it is this: if you ask your insurer to cover repairs, then your deductible becomes an issue. If your insurance company doesn’t pay, then there’s no deductible.
Choose Your Deductible Wisely
Your deductible is one of the two costs you need to worry about with your car insurance. Even though you pay a premium every month, you will pay your deductible if you have to make a claim. Additionally, your deductible can impact your premium: higher deductibles lower premiums and vice versa.
The tricky thing about car insurance deductibles is that you need to make a trade-off between lower premiums and higher out-of-pocket costs. However, an examination of your finances and a talk with your insurance agent can help you come to the right decision.
Did this article help you make a smarter auto insurance decision? Visit our top car tips archive for more ways to save on automotive costs.
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