When you purchase collision or comprehensive auto insurance, you'll encounter the term "deductible." Choosing the right deductible amount is an important decision that affects both your insurance premium and your potential out-of-pocket expenses if you file a claim. What exactly is a deductible, and how do you decide what amount is best for you?
Fast Auto Quote is here to help you understand deductibles so you can make an informed choice.
What is an Auto Insurance Deductible?
A deductible is the amount of money you agree to pay out-of-pocket towards a covered loss before your insurance company starts paying. For example, if you have a $500 deductible for collision coverage and you have an accident that causes $3,000 in damage to your car, you would pay the first $500, and your insurer would cover the remaining $2,500 (up to your policy limits).
Deductibles typically apply to collision and comprehensive coverages. Liability coverage (for damages you cause to others) generally does not have a deductible.
How Deductibles Work with Your Premium
There's an inverse relationship between your deductible amount and your insurance premium:
- Higher Deductible = Lower Premium: When you choose a higher deductible, you're agreeing to take on more financial responsibility in the event of a claim. This reduces the insurer's risk, so they charge you a lower premium.
- Lower Deductible = Higher Premium: Conversely, if you choose a lower deductible, your insurer takes on more risk, so your premium will be higher.
Factors to Consider When Choosing Your Deductible
Selecting the right deductible involves balancing your desire for lower premiums with your ability to cover the deductible amount if you need to make a claim. Here are key factors to consider:
1. Your Financial Situation and Emergency Fund
This is the most crucial factor. Ask yourself: Can I comfortably afford to pay this deductible amount on short notice without causing financial hardship? You should choose a deductible amount that you have readily available in savings or an emergency fund. Don't choose a $1,000 deductible to save on premiums if you don't have $1,000 accessible.
2. Your Risk Tolerance
How comfortable are you with the risk of paying a larger amount out-of-pocket? If you're risk-averse and prefer peace of mind knowing your out-of-pocket costs will be lower in a claim, a lower deductible might be better, despite the higher premium. If you're comfortable with more risk for the sake of premium savings, a higher deductible could be suitable.
3. Your Vehicle's Value
For older cars with lower market values, it might not make sense to pay for a very low deductible, or even to carry collision/comprehensive coverage at all if the car's value is minimal. Conversely, for a newer, more valuable car, you'll want to ensure you can afford the repairs, making the deductible choice more critical.
4. Premium Savings vs. Out-of-Pocket Cost
Ask your insurance agent or use online quoting tools to see how much your premium changes with different deductible levels (e.g., $250, $500, $1,000). Calculate how long it would take for the premium savings from a higher deductible to "pay for" the increased out-of-pocket cost. For example, if raising your deductible from $500 to $1,000 saves you $100 per year, it would take 5 years of being claim-free for the savings to equal the extra $500 you'd pay in a claim.
5. Your Driving Record and Claim Frequency
If you have a history of accidents or claims, or if you drive in high-risk conditions, you might lean towards a lower deductible, anticipating a higher likelihood of needing to use it. If you're a very safe driver with a clean record, you might feel more comfortable with a higher deductible.
Common Deductible Amounts
Deductibles for collision and comprehensive coverage commonly range from $0 (less common and more expensive) up to $2,500 or more. The most frequent choices are often $500 or $1,000.
When to Revisit Your Deductible Choice
It's a good idea to review your deductible amounts periodically, especially when:
- Your financial situation changes (e.g., you build up a larger emergency fund).
- Your vehicle ages and depreciates significantly.
- Your policy is up for renewal.
Balancing Cost and Protection
Choosing the right auto insurance deductible is a personal decision that requires careful consideration of your budget, risk tolerance, and vehicle. The goal is to find a balance that provides adequate financial protection without overstretching your finances, either through high premiums or an unaffordable deductible.
Fast Auto Quote can help you explore options with different deductible levels to find what works best for you.