Auto Insurance Deductibles: When Is Too Much Too Much?

Deciding on an auto insurance deductible is a balancing act between your budget and the amount of risk you can tolerate. A deductible is the amount you pay out of pocket when filing a claim. A higher deductible means a lower insurance rate, but it also means you'll pay more out of pocket if you need to file a claim. For example, if you have a $1,000 deductible and your repairs cost $3,000, you'll pay $1,000 and your insurance will cover the remaining $2,000. Deductibles typically range from $200 to $2,000, and the most common choice is $500. While there's no one-size-fits-all answer, it's important to consider factors like your emergency fund, driving record, and risk tolerance when deciding on your deductible.

Choosing a high deductible

When choosing an auto insurance deductible, it's important to weigh the various options and consider your budget constraints and tolerance for risk. A high deductible typically means a lower insurance rate, but it's also important to ensure you can afford to pay the deductible amount in the event of a claim. Here are some factors to consider when choosing a high deductible:

• Financial situation: If you have an emergency fund or savings that can cover the deductible, a high deductible can be a good option to lower your monthly insurance bills.
• Value of your vehicle: If you have an expensive vehicle, a high deductible might make sense as it can result in higher savings on your premiums.
• Driving history: If you have a good driving record and are less likely to file a claim, a high deductible could be favourable.
• Risk tolerance: A high deductible is a higher risk, so consider how comfortable you are with taking on that risk.
• Affordability: Ensure that the deductible amount is something you can afford to pay out of pocket if needed.
• Claims history: If you rarely file claims, a high deductible might be a good choice as you may save more money over time.
• Location and driving conditions: If you don't live in an area prone to weather events or animal collisions, or if you don't have a long commute or drive in busy areas, you may be less likely to need to file a claim, making a high deductible a more attractive option.
• Budget for auto insurance: If your budget for auto insurance is limited, a high deductible can help keep your monthly costs lower.

It's important to remember that choosing a high deductible means you'll pay more out of pocket if you do need to file a claim. Weigh the potential savings on your insurance rates against the possibility of having to pay a higher amount in the event of an incident. It's also a good idea to consult with an insurance agent to help you make the right decision for your specific situation.

Impact on insurance premium

A car insurance deductible is the amount you pay out of pocket on a claim before your insurance covers the rest. The higher the deductible, the lower the insurance rate, and vice versa. 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.

The relationship between the deductible and premium is that a lower deductible means higher monthly payments. With a low deductible, you have more coverage from your insurance company and pay less out of pocket in the case of a claim. A higher deductible means a reduced cost in your insurance premium, but you'll pay more out of pocket if you file a claim.

For example, if your policy has a line of $5,000 in coverage, a low deductible of $500 means your insurance company is covering you for $4,500. A higher deductible of $1,000 means your company would then be covering you for only $4,000. Since a lower deductible equates to more coverage, you'll have to pay more in your monthly premiums to balance out this increased coverage.

A survey commissioned by InsuraQuotes found that an increase in the deductible from $500 to $1,000 led to an average reduction in premium costs of 8-10%. This varied by state, with Michigan saving only 4% and Massachusetts saving 17%.

When choosing a deductible, it's important to consider the following:

• Can you afford a higher deductible in the case of an incident?
• What is the payback? Do the math to see how much you would save on a lower premium if you had a higher deductible.
• How often do you have accidents? If you have a lot of accidents and claims, you'll want a lower deductible.
• How risk-averse are you? A higher deductible is a higher risk.
• What is the value of your vehicle? Expensive vehicles cost more to insure, so a high deductible might make sense.
• Are you leasing or financing your car? People who are leasing or financing their car tend to choose a lower deductible as it provides better coverage in the case of a claim.
• Can you mix and match deductibles? If you're a good driver, you might be able to offset costs by having a high deductible for collision and a low deductible for comprehensive.

Out-of-pocket expenses

When it comes to auto insurance, out-of-pocket expenses refer to the deductible, or the amount you pay yourself towards a claim before your insurance coverage kicks in. Typically, you pay the deductible every time you file a claim, and it is subtracted from the claim payout. For example, if you have a $500 deductible and your repairs cost $3000, you will pay the deductible and your insurer will cover the remaining $2500.

The amount of the deductible is a key factor in determining the cost of your insurance premium. A higher deductible means a lower premium, and vice versa. This is because a higher deductible means you assume more of the financial risk in the event of a claim. For example, if you increase your deductible from $500 to $1000, you could save around 8-10% on your premium. However, this also means you will pay more out-of-pocket if you do need to make a claim, so it is important to choose a deductible amount that you can afford.

The average car insurance deductible is $500, but they can range from $100 to $2500 or more. When choosing your deductible amount, you should consider your budget, your tolerance for risk, the value of your vehicle, and how likely you are to make a claim. For example, if you have a long commute or often drive in busy areas, you may be more likely to have an accident and need to make a claim, so a lower deductible might be a better option. On the other hand, if you have a good driving record and are comfortable with taking on more risk, a higher deductible could be a good way to lower your premium.

It's also important to remember that if your repair costs are less than your deductible, you will need to pay the entire bill out-of-pocket, as your insurer will only cover costs above the deductible amount. In this case, you may decide not to file a claim at all. Additionally, if you have a loan on your vehicle, your lender may require a certain deductible amount, so be sure to check before selecting your coverage.

Emergency funds

When choosing an auto insurance deductible, it's important to consider your emergency funds. This is because the deductible is the amount you pay out of pocket before your insurance coverage kicks in. While a higher deductible typically leads to a lower premium, it also means you'll pay more if you need to file a claim.

• Assess Your Financial Situation: Before choosing a deductible, evaluate your financial situation, including your emergency fund. If you have sufficient savings to cover a higher deductible in the event of a claim, you may opt for a higher deductible to benefit from lower premiums. However, if your emergency fund is limited, a lower deductible might be more suitable to avoid financial strain in case of an accident.
• Understand the Trade-off: Raising your deductible will reduce your premium, but it also means you'll pay more out of pocket if you need to file a claim. Consider the potential financial impact of choosing a higher deductible. Calculate the difference in premiums between a higher and lower deductible, and determine if the savings over time would cover the increased deductible in the event of a claim.
• Evaluate Your Risk Tolerance: Choosing a higher deductible carries a higher risk. Assess your comfort level with risk. If you're risk-averse, a lower deductible might be preferable, even if it means paying higher monthly premiums. On the other hand, if you're comfortable taking on more risk and have the financial means to do so, a higher deductible could be an option.
• Consider Your Driving History: If you have a history of accidents or engage in high-risk driving behaviours, you may be more likely to file claims. In this case, a lower deductible is usually recommended to minimise your out-of-pocket expenses. Conversely, if you have a good driving record and a low likelihood of filing claims, a higher deductible could be advantageous to save on premiums.
• Value of Your Vehicle: The value of your vehicle also plays a role in the deductible decision. If you drive an older, less valuable car, a high deductible might not make sense because the cost of repairs may not exceed the deductible amount. In this case, opting for a lower deductible and slightly higher premiums might be more cost-effective.
• Plan for Unexpected Expenses: Remember that accidents can happen at any time. Ensure you have enough money set aside to cover the deductible if needed. Your insurance company will not reduce or waive the deductible, so it's important to be prepared for unexpected expenses.

Risk tolerance

When considering your risk tolerance, ask yourself the following questions:

• Do I have an emergency fund that can cover a large, unexpected bill? If you have savings set aside, you may be more comfortable with a higher deductible. Conversely, if you don't have significant savings, a lower deductible may be preferable to avoid a large bill after an accident.
• How likely am I to file a claim? If you have a history of accidents or engage in high-risk driving behaviours, you are more likely to file a claim. In this case, a lower deductible may be a better option to minimise your out-of-pocket expenses. Conversely, if you are a safe driver with a clean record, you may be comfortable taking on the risk of a higher deductible.
• What is the value of my vehicle? If you have an expensive car, a higher deductible may make sense as it will result in higher savings on your premiums. For less valuable cars, a lower deductible may be preferable as the cost of repairs may not exceed a higher deductible.
• Am I leasing or financing my car? If you are leasing or financing a car, you may want to choose a lower deductible to ensure better coverage in the event of a claim. This is important as you are responsible for returning the car in good condition, regardless of whether you receive financial help from insurance.

Ultimately, the decision on your auto insurance deductible depends on your financial situation, driving history, and personal tolerance for risk. It is important to carefully consider these factors and seek advice from an insurance professional to make an informed choice that aligns with your risk tolerance.

Frequently asked questions