Auto Insurance Deductibles: What You Need To Know

Auto insurance deductibles are a predetermined amount of money that you pay towards a claim before your insurance covers the rest. The cost of insurance deductibles varies depending on the type of policy. Choosing a larger deductible typically means you will pay a lower premium, and vice versa. While auto insurance is not tax-deductible for everyone, certain individuals such as self-employed people, reservists in the armed forces, and qualified performing artists may be able to deduct their car insurance premiums.

Auto insurance deductible vs. premium

An auto insurance deductible is the amount of money you pay out of pocket before your insurance company covers the rest. For example, if you have a $500 deductible and $3000 in damage from an accident, your insurer will pay $2500, and you will be responsible for the remaining $500.

When you buy an auto policy, you get to set your deductible along with your coverage limits. You typically have a choice between a low and high deductible. A low deductible means a higher insurance rate, whereas a high deductible means a lower insurance rate.

The relationship between the amount of your premium and your deductible is direct. A policy with a lower monthly premium will typically have a higher deductible. A plan with a higher monthly payment and a lower deductible may be a better option, depending on your circumstances.

When deciding on an insurance policy and deductible amount, it's helpful to consider how often you will use your insurance benefits. If you think you will not use your insurance very often, a plan with a lower monthly premium and a higher deductible will likely be adequate protection. On the other hand, if you think you will be relying on your insurance frequently, a higher monthly premium and lower deductible might be the better way to go.

Choosing your deductible is about balancing your budget and the amount of risk you can tolerate. While lower deductibles can save you money on premiums, there may be trade-offs if your car needs repairs after an accident.

Who can deduct auto insurance from their taxes?

If you use your car strictly for personal use, you likely cannot deduct your car insurance costs on your tax return. However, if you use your car for business-related purposes, you may be able to deduct part of your insurance premium. This includes self-employed people, business owners, and employees whose employers do not plan to reimburse them for expenses related to business use of their car. Armed forces reservists, qualified performing artists, and fee-basis state or local government officials may also be able to deduct their car insurance costs.

To deduct car insurance costs, you must prove that these costs are directly related to business use. In addition to insurance premiums, you may also be able to deduct other auto-related costs such as gas, repairs, parking, and even value depreciation. Your auto-related costs must be more than 2% of your adjusted gross income (AGI) to claim them on your tax return.

If you use your car for both business and personal purposes, you must divide the expenses between personal and business use based on the miles driven for each. You can use either the standard mileage rate or the actual vehicle expenses method to calculate your deduction. The standard mileage rate for 2023 is $0.655 per mile, while the actual vehicle expenses method includes car insurance and other items such as repairs, lease payments, registration fees, and licenses.

What is a deductible?

A car insurance deductible is the amount of money you pay towards a claim before your insurance provider covers the rest. In other words, it is what you pay "out of pocket" on a claim. The amount of the deductible is predetermined.

Collision, comprehensive, uninsured motorist, and personal injury protection coverages all typically have a car insurance deductible. You usually have a choice between a low and high deductible. A low deductible means a higher insurance rate, whereas a high deductible means a lower insurance rate.

For example, if you have a $500 deductible and $3,000 in damage from a covered accident, your insurer will pay $2,500 to repair your car, and you will be responsible for the remaining $500.

It's important to note that there are no annual deductibles for auto insurance, unlike health insurance. You are responsible for your policy's stated deductible every time you file a claim.

How does a deductible work?

An auto insurance deductible is the amount of money you pay out of pocket towards a claim before your insurance company covers the rest. In other words, it is the amount deducted from an insured loss.

For example, if the total cost of repairs to your car after an accident is $1,000, and your insurance company pays $800, you will be responsible for paying the remaining $200.

The deductible is applied to every car insurance claim you make. It is important to note that there are no annual deductibles to meet when it comes to auto insurance. You are responsible for your policy's stated deductible every time you file a claim.

You typically have a choice between a low and high deductible. A low deductible means a higher insurance rate, whereas a high deductible means a lower insurance rate. For example, if you have a $500 deductible and $3,000 in damage from a covered accident, your insurer will pay $2,500, and you will be responsible for the remaining $500.

The two most common car insurance coverages that include deductibles are comprehensive and collision insurance. Comprehensive coverage pays for damage to your vehicle caused by something other than a collision, such as severe weather, theft, or vandalism. Collision coverage, on the other hand, pays for damage to your vehicle when you are in a crash with another vehicle or any stationary object.

In some cases, you may also have a deductible for personal injury protection or uninsured/underinsured motorist coverage. Personal injury protection, also known as "no-fault" insurance, pays medical expenses for the policyholder and anyone else in the vehicle during an accident. Uninsured/underinsured motorist coverage kicks in if you are in an accident caused by a driver who doesn't have enough insurance or no insurance at all.

When choosing your deductible amount, consider how much you would be able to pay in the event of an incident. Your deductible should be set at an amount that you can pay without impacting your lifestyle or financial situation. Additionally, keep in mind that you may be more or less comfortable with higher out-of-pocket costs versus monthly costs.

When do you pay a deductible?

You pay a deductible when you file a claim under a coverage that carries a deductible. This means that you pay the deductible before your insurance company covers the remaining cost. For example, if you have a deductible of $500 and the total cost of repairs is $3000, you will pay $500 and your insurance company will pay the remaining $2500.

It is important to note that you are responsible for paying the deductible every time you file a claim, and it is usually deducted from the claim's approved payout.

There are some instances where you won't have to pay a deductible. For example, if you are in an accident where another driver is at fault, their liability insurance will typically cover the cost of your repairs without you having to pay a deductible. Additionally, liability coverage, which covers damages you cause to another person or their property, does not have a deductible.

Frequently asked questions