How much do you think your insurance policy will end up costing you? If you don’t end up making a claim, the math is simple enough, since you only pay your premiums. But if you need to make a claim, your deductible could add to these costs.
Having insurance is about protecting yourself against risks and worst-case scenarios. Because a deductible is the part of a claim that you pay in those worst-case scenarios, finding the right level for you is essential.
So what is a car insurance deductible, and how does it impact your insurance? Here’s how to make the best of your deductible options.
What is a deductible, anyway?
Your deductible is the amount you will pay when making a claim. So, if you make a claim for $2,000 and your deductible is $500, your insurer will pay $1,500. If your claim is less than your deductible you won’t receive payment from your insurer. If you have $300 in damages and a $500 deductible, you pay for all the repair costs.
This process is why your deductible is so important. It can have a real impact on the costs of your insurance – especially as the deductible for car insurance often applies each time you make a claim.
There’s a trade-off between deductibles and premiums. A lower premium policy will mean if you do make a claim, then the deductible you pay will be higher.
How to choose your car insurance deductible
You get to select the amount for your deductible for each coverage. You may be given a choice of increments, such as $250, $500, etc. But you should choose a deductible that you can comfortably afford should you get into an accident. You can always work with your insurance agent to make the best decision for you.
The value of your vehicle
The value of your car impacts your deductible. Owning an expensive vehicle means that it costs more to insure. In that case, going for a high deductible for an expensive car makes sense because the savings are considerable.
If you have an older car (think: 10 years or older), it’s probably not worth it to have a high deductible. If you set a deductible for it at $1,000, your car’s value is probably only within a couple grand of the deductible. You’re better off going with a lower deductible and saving a bit on your premium.
When deciding on a deductible, think about your bank account.
If you set your deductible to over $1,000, can you afford that when you have to file a claim? If you decide to take on a higher deductible, you should set some money aside in an emergency fund. This will help if you ever need to file a claim.
Assessing your risk
It could be useful for you to think about your chances of filing a claim. To do this, take a look at your driving habits.
If you’re driving every day, you have a long commute time, and you drive during rush hour, you’re more likely to get into an accident. It might be worthwhile to go with a lower deductible if the likelihood of you filing a claim is high.
When do you pay a deductible?
The situations where you will pay a deductible depend on the policy and type of insurance. In the case of car insurance, if you are at fault in an accident, the damage or medical costs of any other drivers would be covered by your liability insurance. Liability insurance has no deductible.
If you also had collision coverage and need to claim for repair costs, your policy probably will have a deductible.
If you’re in a collision that was not your fault, things get a little more complicated. In these situations, you could wind up paying a deductible if you want to get the repairs done quickly. However your insurer could later reimburse you, when they recoup the money from the other driver’s insurance company.
High or low deductible?
Rates and deductibles are related. Usually the higher your deductible, the lower your car insurance rate. This is because you’re taking on more financial risk if you get into a car accident.
According to the Insurance Information Institute, increasing your auto insurance deductible from $250 to $500 could reduce your premium by an average of 15 to 30%. If you opt for a premium of $1,000 the premium could come down by 40%. However, being able to pay your deductible is key to making a claim. You should pick a deductible you can afford – even if it means higher premiums.
What happens if you can’t pay your car insurance deductible?
If you can’t pay your deductible, that’s when things get a little complicated. You could still receive a payment from your insurer. But it might not help if you need repairs in a hurry.
For example if you make a claim for $4,000 in repairs to your car, but you aren’t able to pay your $2,500 deductible, your insurer may still pay you the remaining $1,500, but that won’t do you much good on its own.
That’s why it makes sense to choose carefully when deciding on the deductible on your insurance policy.
Take the time to think about it. Shop around, look at options with a different deductible, see how they change your premium then work out how much this will offset the hit you might take if you make a claim.
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