What is a car insurance deductible?
A deductible is the amount of money you pay out of your pocket towards an insured loss. For example, if you get into a car accident, the insurance company will pay for the damages after you first pay the agreed amount "deducted" from your claim payment. This can be a specific amount, such as $100, $500 or $1,000, or a percentage of your auto insurance policy costs. A deductible acts as a shared risk between you, the policyholder, and your car insurance company.
Your deductible amount is established when you agree to the terms and costs of your auto insurance policy and is found on the front page (declarations) of standard auto insurance policies. Each state provides regulations on how deductibles are incorporated into the policy and implemented. This means deductibles vary state to state based on the coverage types.
The higher deductible you pay, the less the premiums you will pay towards your insurance policy. By taking a higher risk of paying more, insurance companies reward you by lowering your annual or monthly insurance costs. It's a bit of a gamble: Pay less for insurance and hope nothing goes wrong so you aren't out a big chunk of change, or pay more for insurance knowing your provider will cover the majority of the costs should anything go wrong. The choice is yours and you should obtain quotes from multiple insurance companies to find the best rates and features for you.
How deductibles work
As mentioned, deductibles are either a set dollar amount or a percentage. A set dollar deductible is cut from your total payment when filing a claim for a dollar amount deductible. For example, if you have a $500 deductible and your insurance policy states you have an insured loss of $10,000, you will receive a claim check for $9,500 and you will have to pay the repair shop $500.
Percentage deductibles are calculated based on the agreed percentage of the insurance value. It mainly applies to homeowners. For example, if your home is insured for $100,000 with a 2% deductible, it means $2,000 is deducted from every claim you make. If you have an insurance loss of $10,000, for example, you will receive $8,000 as payment and will have to pay the additional $2,000 out of your own pocket. It is rare to find auto insurers operating in this fashion but many insurance companies provide discounts if you "bundle" your home and auto insurance through the same company and it is something to be aware of when selecting your policies.
When to choose a higher deductible
Choosing a high car insurance deductible is an excellent way to lower your monthly premiums. However, since you will have to pay the difference if you need to file a claim, you should only go for a higher deductible if you have enough savings. Having an emergency savings account means you can confidently pay higher amounts from your pocket. If you want to save money on your premiums, take time to set aside deductible costs in a savings account and keep it there so you don't get hit twice: once on the road and once in your wallet.
You may be a safe driver with a clean driving record, but that doesn't mean there aren't uninsured drivers out there who can cause accidents at any point — just one more reason to stash away some cash. You might be involved in a collision and have to pay a deductible to fix your car even if it was not a fault accident.
When to pay lower deductibles
You should choose a lower deductible if you know you won't be able to sock away enough cash if you're in an accident and have to pay a deductible. This is especially true if you live in a congested area with a high chance of being involved in a fender bender.
Car insurance deductibles range between $100 and $2,000 and insurance agents will often suggest a $1,000 deductible as the sweet spot. Of course, paying $1,000 to have your car repaired after an accident is another hit to your wallet. If $100 makes you feel more comfortable on the road, understand you will pay a premium on your premiums.
What if you cannot pay the deductible?
During an accident or any event, you need to file a claim to your insurers so that they can process your payment and car repair. Your insurance company will then write you a check for the amount it's responsible for, the minimum coverage, and you will have to pay for the remaining amount as the deductible. However, what happens when you cannot afford the deductible?
If you cannot pay the remaining repair costs, you still have options, including:
- A payment plan. Negotiate with your mechanic to waive your deductible or discuss a payment plan. This will help get your car fixed, get back to the road, and pay the remaining portion later.
- A different mechanic. You are not restricted to the mechanic your insurance company suggests, nor are you restricted to the mechanic who provided a quote. If the repair costs are too much, you can take your car to a different repair shop. Taking a cheap car insurance check to another mechanic can help you land a more affordable repair deal.
- A personal loan. If you are involved in a fault accident, and your vehicle and other parties need urgent fixing, obtaining a loan may be the best option. A loan will help you get back to the road faster and sets you up with a payment plan you can manage.
A deductible is an amount you pay towards an insurance loss before your filed claim comes to action. The type of deductible you choose is based on several factors, such as the average cost of car insurance, your driving history, driving record, and your financial status. Choosing a higher insurance deductible reduces your annual premiums and benefits insurers' numerous insurance discounts. On the other hand, selecting a lower deductible allows you to save towards the emergency fund but increases your annual premiums. Make the choice that fits your wallet and gives you peace of mind.