The deductible is the amount that is "subtracted" from the insured loss. In other words, the deductible is the amount a person has to pay out of pocket for repair or replacement after an accident.
Let's say you're riding a fender bender. The total cost of the repair is $1,000 for him, and the insurance company will pay him $800. The amount owed (deductible) is $200.10. Determining a deductible amount can be difficult for many consumers.
How do auto insurance deductibles work?
Traditional auto insurance typically requires consumers to choose between a comprehensive deductible and an individual collision deductible, which may be the same. The liability coverage in the insurance contract does not stipulate deductibles.
Comprehensive insurance protects your vehicle against theft or damage that is not caused by accident. If you claim Collision Damage Waiver damage, the policy deductible will apply, but you may not be required to pay the Collision Damage Waiver Deductible. For example, your insurance company may pay for cracked or chipped windshields in full, depending on your state.
Comprehensive insurance covers the cost of damage to your vehicle caused by a collision with a response object. Any claim you make for damage covered by a collision is subject to collision excess.
Higher deductibles allow consumers to pay a portion of the total cost of a claim, resulting in lower annual, semi-annual, or monthly premiums. Be aware that in the case of a self-inflicted car accident, the deductible goes out of the policyholder's pocket, so the premium savings may go unnoticed.
Conversely, a lower deductible will increase your premium payments. If the policyholder didn't cause the accident that caused the damage, he or she pays more for auto insurance than someone with a higher deductible.
When do you pay your car insurance deductible?
A better question is when you don't have to pay a car insurance deductible. Most of the time it's up to you, but not in accidents caused by someone else's driving. You also do not have to pay a deductible if the damages you claim are covered by liability insurance that covers personal injury and property damage in an accident for which you are responsible. However, this applies only if the costs are within the purchased coverage.
Finally, a reduction in the deductible amount may ultimately result in a reduced or no deductible amount. This type of overage rewards drivers for avoiding accidents by reducing overages to remain accident-free each year.
When choosing your deductible, remember that you are more or less happy with a higher deductible than your monthly costs. The cost will increase when billed.
When deciding on an appropriate deductible, you should ask yourself these five questions before making a decision.
5 questions for choosing the right car insurance deductible
When deciding on an appropriate deductible; you should ask yourself these five questions before making a decision.
How do different deductibles affect the premium?
This is a good question. No two insurers will have the same deductible-to-premium ratio, and the regulatory approach to this issue varies from state to state. Different states may have different rules on how the deductible is included in the policy.
Overall, increasing the deductible from $200 to $500 could reduce collision and comprehensive premiums by 15% to 30%, and increasing the deductible to $1,000 could save more than 40%.
What are the disadvantages of high deductibles?
Let's say an unknown driver accidentally evades the car, causing $800 in damage to the owner. The owner has a $1,000 deductible. His $800 is now out of the owner's wallet. However, if the owner has his $100 deductible, his out-of-pocket is only $100, saving $700.
Is it economically better to have a lower deductible and a higher premium?
It depends. A person with a low deductible and a high premium rate can go 10 years without making a claim. That person will pay more total premiums during that time than others with higher deductibles. Alternatively, one person can file multiple claims in just a few years.
So how do you decide which solution is best for you? Some questions to ask yourself are:
Do you like to take on certain financial risks with higher deductibles, or do you feel uncertain about your prospects?
Is there an economical means of paying a higher deductible if forced?
If you are currently struggling financially, a higher deductible is likely to be better as it will lower your overall premiums. But do you have enough cash to pay the deductible in the event of a self-inflicted accident? The best practice is to set up an emergency fund to cover the higher deductible before claiming it.
How does my driver's license affect my deductible selection?
The current opinion is that the cleaner your driving record is, the cheaper your insurance will be, so you should consider increasing your deductible.
On the other hand, those who don't have clean driving records should consider lower deductibles despite the additional premiums. Also, consider programs that reward safe driving, such as Nationwide's Vanishing Deductible. With this program, you can earn a crash damage waiver and/or a $100 rebate on excess crashes for safe driving each year. Up to $500 total.
The bottom line is that choosing the right deductible takes time and thought. A professional insurance agent can help consumers make the best decisions based on their driving style, current financial situation, credit rating, and overall financial planning goals.
