Buying car insurance means making choices that could be consequential for your vehicle protection down the line. One major decision is your deductible, or the flat amount you need to pay before insurance steps in to cover a claim.
But while it’s simple on the surface, understanding how an auto insurance deductible works is essential to making the right decision for you.
Note: These tips should not be considered official insurance guidance. Please consult an insurance professional or broker when making decisions regarding insurance.
What Is a Car Insurance Deductible?
In simple terms, a car insurance deductible is the amount you’re responsible for paying when you file a claim. Once your deductible is paid, your insurance will step in to cover the remainder, up to a set limit. Think of it as your initial contribution towards the repair or replacement of your vehicle after an accident or other covered event.
How Does a Deductible Work?
When you buy a car insurance policy, you’ll select a deductible. Auto insurance deductibles often start at $250 to $500, but they can go up to $1,000 or even higher. Generally, the higher your deductible, the lower your monthly insurance premiums, and vice versa.
Here’s an example of how this works in practice, assuming a $1,000 deductible:
- You’re involved in a car accident that results in $10,000 worth of damage to your vehicle.
- You file a claim with your insurance company.
- You pay the $1,000 deductible to the repair shop.
- Your insurance company steps in to pay the remaining $9,000 of the repair costs.
In auto insurance, each claim is subject to its own deductible. That means that if you file multiple claims over the course of a year, you may have to pay your deductible several times.
Generally, policyholders are able to set a separate deductible for each type of coverage, such as $500 for collision and $1,000 for comprehensive. However, not every type of insurance has a deductible. For instance, deductibles typically don’t apply to liability coverage, which covers damages you cause to others in an accident.
Why Does Your Deductible Matter?
Choosing a deductible means balancing your monthly expenses with your upfront costs in the event of an accident. As previously mentioned, a higher deductible typically leads to lower premiums, which can save you money on your monthly insurance bills. However, it also means you’ll have a higher out-of-pocket cost for each claim.
When you opt for a higher deductible, you may also end up “using” your auto insurance less frequently since you’ll need to reach a higher threshold before it makes sense to file a claim. That’s not necessarily a bad thing, as an auto insurance claim typically leads to a rate increase.
Regardless, it’s important to choose a deductible that you can comfortably afford to pay in the event of an accident. Consider your savings and financial situation when making this decision.
Choosing the Right Deductible
Selecting a car insurance deductible requires you to balance financial considerations and risk management. To make an informed choice, there are a few questions to consider:
1. How comfortable are you with financial uncertainty?
A higher deductible means a greater out-of-pocket expense in the event of a claim. If you’re a cautious individual with a low appetite for risk, opting for a lower deductible might provide peace of mind. Conversely, if you’re willing to shoulder more risk in exchange for lower monthly premiums, a higher deductible could be suitable. Consider your driving habits, location, and the likelihood of filing a claim when evaluating your risk tolerance.
2. What are your budgetary constraints?
Car insurance premiums and deductibles have an inverse relationship. A lower deductible translates to higher monthly premiums, while a higher deductible leads to lower premiums. Analyze your monthly budget to determine the amount you can comfortably allocate to insurance payments. While you can’t always stay within your limit, this will give you an idea of what price you should aim for.
3. How much do you have in your emergency fund?
Your ability to pay your chosen deductible in the aftermath of an accident is critical. Before selecting a deductible amount, make sure you have enough funds on hand to cover it. Ideally, your emergency fund should include at least your deductible, plus other unexpected expenses.
If your savings are limited, a lower deductible might be a better option to avoid taking on debt due to a claim. You can also spend time building up your savings to justify a higher deductible, potentially with the money you’ll save on your premium.
Making the Right Decisions for Your Insurance
Understanding your car insurance deductible is crucial for making informed decisions about your coverage and financial planning. As a general rule of thumb, you’ll want to choose the highest deductible you can afford in order to control your premiums. Just make sure you have enough cash on hand to cover it in case of an accident.
And that’s not the only way to save money on your car insurance. Make sure you’re never overpaying for coverage by signing up for Auto Quote Tracker. We’ll keep an eye on your policy and let you know when your rates are set to go up, so you can shop around to get the best deal.
