Understanding Auto Insurance Deductibles: Why Pay More?

An auto insurance deductible is the amount of money you are responsible for paying out of pocket when you file a claim with your insurer for a covered loss. In other words, it's the amount you pay towards the cost of repairs or replacement of your vehicle after an accident before your insurance company covers the rest. The deductible is usually applied to collision and comprehensive insurance claims, but it may also apply to other types of coverage, such as personal injury protection or uninsured/underinsured motorist property damage, depending on state laws and your specific policy. The deductible amount you choose can impact your insurance premium, with a higher deductible typically resulting in a lower premium and vice versa. Ultimately, when choosing your deductible amount, it's important to consider your budget, driving habits, and state-specific rules to ensure you can comfortably afford the out-of-pocket expenses in the event of a claim.

How does an auto insurance deductible work?

An auto insurance deductible is the amount of money you are responsible for paying out-of-pocket when you file a claim for repairs to your vehicle. The deductible is applied to every car insurance claim you make, and it is subtracted from the insurance payout. 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.

When choosing an insurance deductible amount, consider how much you would be able to pay in the event of an incident. A higher deductible will lower your insurance premium, but it will also increase your out-of-pocket costs if you file a claim. On the other hand, a lower deductible will increase your premium, but you will have lower out-of-pocket expenses in the event of a claim.

There are two main types of auto insurance deductibles: collision and comprehensive. Collision coverage pays for damage to your vehicle when you are in a crash with another vehicle or any stationary object, while comprehensive coverage pays for damage to your vehicle in instances other than a crash, such as theft, vandalism, or natural disasters.

In addition to collision and comprehensive coverage, personal injury protection and uninsured/underinsured motorist coverage may also have deductibles, depending on the state and the specific policy. Liability insurance, which covers bodily injury and property damage for the other party involved in an accident, typically does not have a deductible.

When choosing an auto insurance deductible, it is important to consider your budget, driving habits, and state-specific rules. Some states offer ways to reduce or avoid deductible payments, such as diminishing deductibles or collision deductible waivers. Ultimately, the right deductible for you will depend on your financial situation and comfort level with risk.

What types of car insurance have deductibles?

An auto insurance deductible is the amount you pay out of pocket when filing a claim with your insurer. The deductible amount is determined by the policyholder, who must choose between a low and high deductible. A low deductible results in a higher insurance rate, while a high deductible leads to a lower insurance rate.

There are two common types of car insurance that include deductibles:

• Collision coverage: This type of insurance covers the cost of repairs or replacement of your vehicle if it is damaged in a collision with another vehicle or object. The policyholder must pay the collision deductible, and the insurance company will cover the remaining costs up to the policy's limit.
• Comprehensive coverage: This insurance type covers damage to your vehicle caused by events other than collisions, such as theft, vandalism, natural disasters, etc. Similar to collision coverage, the policyholder pays the comprehensive deductible, and the insurer covers the remaining costs.

In some states, there may also be deductibles for the following types of car insurance:

• Personal Injury Protection (PIP): This coverage pays for medical expenses and sometimes lost wages or other damages, regardless of who is at fault in the accident.
• Uninsured/Underinsured Motorist Coverage: This coverage helps pay for repair expenses if you're in an accident caused by a driver who doesn't have insurance or whose insurance is insufficient.

How do deductibles impact insurance premiums?

An auto insurance deductible is the amount of money that the policyholder must pay towards an insured loss. This is subtracted from the amount that the insurance provider will pay in the event of a claim. For example, if the policyholder has a $500 deductible and the cost of repairs is $3000, the insurance provider will pay $2500.

The deductible is how risk is shared between the insurance provider and the policyholder. The higher the deductible, the lower the insurance premium, as the policyholder is assuming more financial responsibility in the event of a claim. Conversely, a lower deductible will result in a higher premium, as the insurance provider assumes more financial responsibility.

For example, increasing a deductible from $200 to $500 could reduce collision and comprehensive coverage costs by 15% to 30%, according to the Insurance Information Institute (III). Moving to a $1000 deductible may save 40% or more. However, the savings will depend on other factors, such as the value of the vehicle, driving record, miles driven, location, and claims frequency.

It's important to note that the deductible applies every time a claim is filed. Additionally, the type of claim may impact whether a deductible applies. Generally, deductibles apply when there are covered damages to the policyholder's car, and not when there are damages to another driver's vehicle.

When choosing a deductible, it's essential to consider one's budget and comfort level with potential out-of-pocket costs versus premium savings. A higher deductible may result in lower premiums, but it also means the policyholder will pay more out of pocket in the event of a claim. On the other hand, a lower deductible will result in higher premiums but lower out-of-pocket costs when filing a claim.

How to choose a deductible?

Choosing a car insurance deductible involves several considerations, and it's important to select an amount that suits your financial situation and driving habits. Here are some steps to help you decide:

• Evaluate your budget: Opting for a higher deductible lowers your insurance rate but leads to higher out-of-pocket expenses if you're in an accident. Conversely, a lower deductible results in higher insurance rates but lower costs after an incident. Choose a deductible that aligns with your financial capabilities and comfort level.
• Assess your driving habits: Consider how often you drive and the areas you frequent. If you're on the road frequently or drive in high-risk locations, selecting a lower deductible can be prudent to minimise potential out-of-pocket expenses in case of an accident.
• Determine your car's value: Evaluate the market value of your vehicle. If your car is older and has a lower value, a high deductible may not be cost-effective, as you could end up paying more in deductibles than the car is worth.
• Check state laws and insurer offerings: Some states have specific rules about deductibles, and certain insurance providers offer features like diminishing deductibles, which reduce your deductible amount over time if you don't file any claims. These factors can influence your decision.
• Gauge your risk tolerance: Assess your comfort level with financial risk. If a high deductible makes you anxious, it's better to opt for a lower one, even if it means paying higher insurance rates.
• Research local repair costs: Consider the average car repair costs in your state. If repair costs are high, a lower deductible coupled with a higher premium might be preferable to expedite the repair process. Conversely, if repair rates are relatively low, a higher deductible could be a more economical choice.
• Factor in high-risk or new drivers: If there are high-risk or new drivers on your policy, the likelihood of filing a claim increases. In such cases, choosing a full coverage policy with a higher deductible can provide a balance between annual or monthly premiums and unexpected out-of-pocket expenses.

When are you not required to pay your deductible?

There are several scenarios in which you may not be required to pay your auto insurance deductible. Here are some of the most common situations:

• Liability-Only Claims: Liability insurance typically does not have a deductible attached. So, if you are filing a claim for damages or injuries caused to another person or their property, you may not have to pay a deductible.
• No-Deductible or Zero-Deductible Insurance: Some insurance companies offer no-deductible or zero-deductible insurance policies, where you pay higher monthly premiums but do not have to pay any deductible in the event of a claim.
• Subrogation: If the accident was caused by another driver, your insurance company may pursue a process called subrogation to recoup the costs they have paid, including your deductible, from the at-fault driver's insurance company.
• Disappearing Deductible Programs: Certain insurers offer disappearing deductible programs, where your deductible amount decreases or is waived if you go a certain amount of time without filing a claim or having a violation.
• Glass Claims: In some states or with certain insurers, you may not have to pay a deductible for glass repairs or replacements, such as a cracked windshield.
• Not at Fault: If the other driver is officially deemed at fault, their insurance company will typically cover the cost of repairs, and you won't have to pay your deductible.
• Uninsured Motorist Coverage: If you are hit by an uninsured driver who is at fault, some states and insurance policies may waive the deductible for uninsured motorist coverage.
• State-Specific Laws: Some states, like South Carolina and Kentucky, have laws that prohibit insurers from collecting deductibles for certain types of repairs, such as windshield replacements.
• Low Repair Costs: If the cost of repairs is less than or close to your deductible, it may be more cost-effective to pay for the repairs yourself and avoid filing a claim altogether.

Frequently asked questions