Understanding Auto Insurance Deductibles: How Do They Work?

An auto insurance deductible is the amount of money a policyholder must pay out of pocket towards a claim before their insurance provider covers the remaining costs. In other words, it is the portion of the financial burden that the policyholder agrees to shoulder after an insured loss. Deductibles are applied to each car insurance claim made by the policyholder and can vary depending on the type of policy and coverage. The most common types of auto insurance coverage that include deductibles are collision coverage, comprehensive coverage, uninsured motorist coverage, and personal injury protection.

How does an auto insurance deductible work?

An auto insurance deductible is the amount of money you are responsible for paying before your insurance company begins to cover costs. It is the amount you pay "out of pocket" on a claim before your insurance covers the rest. Collision, comprehensive, uninsured motorist, and personal injury protection coverages all typically have a car insurance deductible.

When you file a claim with your insurance company, your deductible is subtracted from the insurance payout. For example, if you have an approved claim for $2,000 to repair your car and your deductible is $750, your insurance company will send you a check for $1,250.

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 to repair your car, and you'll be responsible for the remaining $500.

Auto insurance deductibles are applied on a per-claim basis, so how often you make claims is very important. If your policy has a $500 deductible and you are involved in four separate claims of less than $500 each, then you would be responsible for 100% of those costs. Your insurance would provide no coverage.

No-deductible car insurance, also called zero-deductible insurance, allows you to pay nothing out of pocket after an accident—in exchange for higher monthly payments.

Choosing the right deductible amount

Choosing the right auto insurance deductible amount depends on several factors, including your financial situation, the value of your car, and your tolerance for risk. Here are some things to consider when selecting your deductible amount:

• Value of Your Car: The value of your car plays a crucial role in determining your deductible amount. If your car is worth more, opting for a higher deductible can make sense as it will lower your insurance rates. Conversely, if your car is not worth much, a lower deductible is generally better since the insurance company will only pay up to the car's value in case of a total loss.
• Your Savings: Evaluate your savings and consider how much you can afford to pay for repairs after an accident. If paying a high amount for repairs would be challenging, choosing a lower deductible is advisable, even if it means slightly higher insurance premiums. On the other hand, if you have sufficient savings and can afford a higher deductible, it can help lower your overall insurance costs.
• Cost Difference: Compare the cost difference between policies with high and low deductibles. Calculate your potential out-of-pocket expenses under different scenarios, such as filing no claims, one claim, or multiple claims. This will help you understand the financial implications of different deductible amounts.
• Likelihood of Filing a Claim: Consider your driving history and the likelihood of filing an insurance claim. If you have a history of accidents or engage in high-risk driving behaviours, you may be more likely to file a claim. In this case, a lower deductible plan might be more suitable. Conversely, if you are a safe driver with a clean record, opting for a higher deductible can result in lower overall costs.
• Tolerance for Risk: Choosing a high-deductible plan is a gamble that you won't have an accident. If you select a high deductible and do end up in an accident, you will be responsible for higher out-of-pocket costs. Assess your comfort level with risk and choose a deductible that aligns with your risk tolerance.
• Your Financial Situation: Consider your overall financial situation and budget. If you have an emergency fund and stable finances, you may be able to handle a higher deductible. On the other hand, if money is tight, a lower deductible might be a better choice, even if it means higher monthly insurance costs.

Remember, there is no one-size-fits-all answer when choosing a deductible amount. It's essential to carefully consider your circumstances and weigh the potential costs and benefits of different deductible options.

When do you pay your deductible?

You pay your auto insurance deductible when you file a claim under a coverage that carries a deductible. This means that you will pay your deductible every time you file a claim that uses a specific coverage type. For example, if you have a $500 deductible and $3,000 in damage from a covered accident, you will pay the $500 deductible first, and your insurer will cover the remaining $2,500.

Your deductible may be waived in certain circumstances, such as when repairing minor glass damage like chips or cracks in a windshield. In some states, your insurer may repair or replace your windshield without requiring a deductible, or they may offer you the option of choosing a $0 deductible for glass claims.

It's important to note that your deductible applies per accident rather than once a year. Additionally, if your auto insurance deductible is higher than the cost of the damage to your vehicle, you will pay for the entire cost out of pocket as the insurer only covers damages above your deductible amount.

When it comes to choosing a deductible, consider your financial situation and comfort with risk. A higher deductible will lower your overall insurance rate, but it will increase your out-of-pocket costs if you file a claim. On the other hand, a lower deductible will result in higher insurance premiums but lower out-of-pocket costs if an accident occurs.

No-deductible car insurance

With no-deductible coverage, the entire cost of the policy is weighted in the premiums. Because the insurer carries all the risk associated with a potential accident, no-deductible policies tend to cost more than traditional car insurance. This heightened risk also means that few companies are willing to offer this type of policy. Those that do may require you to have an excellent driving record and a good credit score.

Liability policies are always no-deductible car insurance. This type of coverage pays for bodily injury and property damage suffered by others if you cause an auto accident. Windshield replacement is also often a no-deductible option from car insurance providers.

While no-deductible insurance can provide peace of mind and protect you from unexpected costs, it may cost you more in the long term due to higher premiums. It may also be difficult to find, as few car insurers offer it.

Comprehensive and collision coverage

Comprehensive Coverage

Comprehensive coverage pays for damage to your vehicle in non-collision incidents. This includes damage from falling tree limbs, hail, theft, fire, vandalism, and other non-collision events. It also covers damage caused by animals, such as a deer colliding with your car. Comprehensive coverage is typically required for a car loan or lease and is usually cheaper than collision coverage. The deductible for comprehensive coverage is usually between $100 and $2,000, and you can choose a different deductible for this coverage than for collision coverage.

Collision Coverage

Collision coverage, on the other hand, covers damage to your vehicle resulting from a collision with another vehicle or object. This includes accidents with other vehicles, single-car rollovers, and accidents with stationary objects like road signs and guardrails. Collision coverage does not cover damage to other vehicles or property. Like comprehensive coverage, collision coverage is typically required for a car loan or lease. The deductible for collision coverage is also usually between $100 and $2,000, and you can choose a different deductible amount for this coverage.

When selecting your deductibles for comprehensive and collision coverage, it's important to consider how much you would be willing to pay out of pocket if your car was damaged. Choosing a higher deductible will result in a lower premium, but you will have higher out-of-pocket expenses if you get into an accident.

Frequently asked questions