Your deductible is one of the most important decisions you will make when choosing an auto insurance policy, so it’s important to have a good understanding of what it is. It is also important to understand the factors that determine the deductible and what it affects throughout your policy so you can make informed decisions.
What is an Auto Insurance Deductible?
The deductible is the amount of money that you are responsible for paying out of your pocket in the event of an accident before your car insurance coverage starts to have effect for any claims for insured events. The amount of the deductible will directly affect your premiums.
For instance a policy that has a low deductible will have a higher premium and vice versa. For many drivers, increasing your deductible translates to lower auto insurance premiums but it also exposes you to a higher level of risk because you will be paying more out-of-pocket expenses in the case of an accident before your insurance kicks in.
This is why it is important to have a deductible that you can comfortably afford along with the cost of the policy. If you ever need to use your insurance you will have to pay the monthly premium and the deductible at the same time.
Should you have a higher or lower deductible?
When you purchase car insurance is important to consider budget in order to find a comfortable balance between affordable premiums and the ability to pay a deductible when you least expect it – since most car accidents happen at inconvenient times. When it comes to working out what your deductible should be, simply ask yourself how much risk you are able to shoulder compared with the potential amount of savings you can get from paying a higher deductible. To help you arrive at the right decision, it is important to understand exactly why increasing your deductible lowers your premiums.
Paying a higher deductible tells your insurance carrier that you would be less likely to file a claim if you are able to absorb the cost of the repairs. Effectively, this means you represent a low risk in the eyes of the provider. Consequently, if you are confident that you have sufficient savings to rely on that will allow you to cover the repair bill in the event of an accident, then accepting the higher risk in exchange for lower premiums might be worth it.
Furthermore, if you are a very careful driver and don’t rely on your car for work, your chances of getting into an accident are much reduced, so paying a higher deductible would be a good choice. It is also worth noting that rather than opting for a low deductible, you can actually be saving the difference in premiums between a higher and lower deductible so that you can comfortably pay for any repairs without having to involve your insurance company. This means the savings you get from lower premiums can actually be used to offset any need for an insurance claim, which will drive up your premiums anyway.
On the other hand, it is worth checking to see if the savings you’ll be making from lower premiums is worth the financial risk you are taking with a high deductible. If the amount of the savings is small, and it would take you a long time to recoup in case you had to make a claim, then it would probably be worth it to accept the minimal increase in your premium.
For example, let’s say you raise your deductible from $ 450 to $ 900, but your savings is only $100 a year. If you made a claim and paid $450 out of your own pocket, it would take you almost ten years to recoup the increased deductible. In this case, you might be better off just with a low deductible and pay the higher premiums.
If you have a car that has depreciated considerably, then paying a high deductible will not be worth it in the circumstances. On the other hand, if you have a brand new car, opting for a higher deductible will save you more money in the end.
If you decide to pay a lower premium and accept a higher deductible, it can certainly help with your monthly budget but can also open you up to higher costs in the event of a car accident. For example, if you’ve been in an accident and need your car for work and have to pay a high deductible, many repair shops will not waive your deductible under any circumstances.
They will require that you pay repair costs upfront before fixing your car. This means if you are unable to pay the deductible and rely on your car to get to work, this could really put you out. Consequently, if you are reliant on your car to earn a living, then it may be worth it to bear the higher premiums in exchange for the peace of mind that you can get your car fixed when required.