Understanding Auto Insurance Deductibles: The Standard Or The Exception?

An auto insurance deductible is the amount you pay out of pocket when you file a claim before your insurance coverage kicks in. Most auto insurance policies have deductibles, and the amount of the deductible varies depending on the type of policy. The most common deductible amount is $500, but deductibles can range from $0 to $2,000. When choosing a deductible amount, it's important to consider your financial situation and the likelihood of filing an insurance claim. A higher deductible will lower your insurance rate, but it will also increase your out-of-pocket costs if you need to file a claim. On the other hand, a lower deductible will result in a higher insurance rate, but you'll pay less out of pocket if you need to make a claim.

Choosing a deductible amount

Firstly, it's important to understand the relationship between the deductible and the insurance premium. In general, a higher deductible results in a lower premium, while a lower deductible leads to a higher premium. This is because a lower deductible means the insurance company may have to pay more in future claims, so they charge a higher rate upfront. On the other hand, a higher deductible means you assume a greater share of the risk, resulting in lower upfront costs.

Secondly, evaluate your savings and consider the potential cost of repairs. If paying a large sum for vehicle repairs would be financially challenging, opting for a lower deductible might be more suitable, even if it means slightly higher insurance rates. Conversely, if you can afford to pay a higher amount for repairs, choosing a higher deductible can help lower your insurance rates.

Thirdly, assess your tolerance for risk. Even the safest drivers may encounter accidents, so consider whether you are comfortable with the possibility of paying a large amount out-of-pocket in the event of a claim. A lower deductible provides greater peace of mind and ensures the insurance company covers a larger portion of the repair costs. On the other hand, a higher deductible reflects a willingness to take on more risk and pay higher out-of-pocket expenses in exchange for lower insurance rates.

Additionally, consider the value of your vehicle. If you own an older, less valuable car, you may opt for a lower deductible to minimise out-of-pocket expenses in the event of a claim. In contrast, those with newer, more expensive cars may prefer a higher deductible to take advantage of lower insurance rates.

Lastly, compare quotes from different insurance companies and evaluate how different deductible amounts affect your rates. Some companies may offer similar rates for $500 and $1,000 deductibles, making the lower deductible a more attractive option.

Remember, there is no "wrong" choice when it comes to choosing a deductible amount. It depends on your financial situation, risk tolerance, and personal preferences. Select a deductible that aligns with your budget and provides you with the most comfort and confidence.

How deductibles work

An auto insurance deductible is the amount you pay out of pocket when you file a claim before your insurance coverage kicks in. In other words, it is the amount you pay towards an insured loss. It is a form of risk-sharing, where you agree to shoulder a portion of the financial burden in exchange for protection against covered events or losses.

When you build a car insurance policy, you decide on the deductible amount, which is often either $500 or $1,000. A deductible can be a flat rate or a percentage of the total amount of insurance on your policy. The amount is established by the terms of your coverage and can usually be found on the declarations page of standard insurance policies.

Let's say your policy states a $500 deductible, and your insurer has determined that you have an insured loss worth $10,000. You would receive a claims check for $9,500, with the deductible amount subtracted. If you have a percentage deductible, it is calculated as a percentage of your home's insured value. For example, if your house is insured for $100,000 and your insurance policy has a 2% deductible, you would pay $2,000 towards a $10,000 claim, receiving a payout of $8,000.

It's important to note that the deductible applies each time you file a claim with auto insurance or a homeowners policy. There are exceptions in Florida and Louisiana, where hurricane deductibles are applied once per season rather than per storm. Additionally, deductibles generally apply to property damage and not the liability portion of homeowners or auto insurance policies.

Choosing a higher deductible typically results in lower premium payments. This is because you're assuming a greater share of the risk, which saves you money upfront. However, it's crucial to remember that a higher deductible means you'll pay more out of pocket if you need to file a claim.

Comprehensive coverage

When you file a comprehensive claim, you will be responsible for paying your selected deductible before your insurance company starts paying for the damages. The deductible is the amount you agree to pay out of pocket to repair or replace your vehicle after your claim is approved. The remaining approved costs are then covered by your insurance company, up to the actual cash value of your vehicle.

The comprehensive deductible amount you choose will determine your out-of-pocket costs for repairs and will also impact your car insurance rate. A lower comprehensive deductible saves you money on out-of-pocket repair costs, but you'll usually have a higher insurance rate. On the other hand, a higher deductible typically means a lower insurance rate, but you'll pay more out of pocket for repairs.

Comprehensive deductibles can range from $100 to $2,000 in most states, and the right amount for you depends on your preferences and needs for out-of-pocket costs and your overall insurance rate. It's important to consider the common hazards in your area when choosing your comprehensive deductible. If you live in an area where natural disasters, vandalism, falling objects, or collisions with wildlife are common, you may benefit from a low comprehensive deductible because you may have a higher likelihood of filing a comprehensive claim.

Collision coverage

When deciding on the amount of your deductible, consider the cost of your car and its potential corresponding repairs, as well as your willingness to pay for repairs under the deductible amount. A higher collision deductible means you will cover more of the repair costs when they arise, which in turn lowers your monthly premium. On the other hand, a lower deductible results in a higher monthly premium but can provide better protection in the event of an accident.

The average cost of collision coverage is about $290 per year, and deductibles for collision coverage can vary from a few hundred dollars to more than $1,000, depending on the policy. Some insurers may even offer a disappearing deductible program, where the deductible amount decreases or is waived if you go a certain amount of time without a claim.

When to pay a deductible

You pay your deductible any time you file a claim under a coverage that carries a deductible. This is usually the case for comprehensive and collision coverage, as they cover damage to your vehicle in a wide variety of situations. Comprehensive coverage deals with damage from non-accident events, like natural disasters, while collision coverage pays for repairing your vehicle even if you cause the accident.

You will also have to pay a deductible for uninsured and underinsured motorist coverage. This type of insurance covers expenses resulting from an accident caused by an uninsured driver or a driver whose coverage limits are too low.

Personal injury protection, also known as PIP, may require you to pay a deductible, depending on your state. PIP covers medical expenses for you and your passengers in the event of an accident, regardless of who is at fault.

It is important to note that you may not need to pay a deductible if you are not at fault in an accident. In such cases, the at-fault driver's liability insurance should cover the cost of repairs. However, if their coverage limits are too low, you may need to rely on your own underinsured motorist coverage, which typically has a deductible.

Additionally, if the cost of repairs is less than your deductible, you may not want to file a claim as it could cause your insurance premium to increase. In this case, you would pay for the repairs out of pocket.

Frequently asked questions