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Five questions to help you choose the right car insurance deductible

One way to save money when insuring a car is to increase the deductible, which is the dollar amount "deducted" from an insured loss. For many consumers, determining just how much of a deductible to take can be a difficult decision.

Conventional automobile insurance policies generally require the consumer to select one deductible for comprehensive coverage, and a separate deductible for collision coverage, although they may be the same deductible amount. The liability coverage in the policy does not involve a deductible.

The higher a deductible, the lower the annual, biannual or monthly insurance premiums may be because the consumer is assuming a portion of the total cost of a claim. Keep in mind that the deductible amount will come out of the policyholder's pocket in the event of an at-fault car accident, which could overshadow the premium savings.

Conversely, a low deductible will increase the premium payments. If the policyholder does not have an at-fault accident resulting in a claim, the individual has paid more for automobile insurance than someone with a higher deductible.

In determining the right deductibles, here are five questions to consider before making the decision:
  1. How do different deductible levels affect the insurance premium?

    This is a good question as no two insurance companies will have the same deductible-premium ratio, and states differ on their regulatory approach to the subject. Each state may have different rules regarding the way a deductible is incorporated into an insurance policy. By and large, increasing the dollar deductible from $200 to $500 could potentially reduce collision and comprehensive coverage premium costs by 15% to 30%, whereas increasing the deductible to $1,000 may save 40% or more.

  2. What’s the downside of a high deductible?

    Let's say an unknown driver has inadvertently sideswiped a car, costing the owner $800 of damage. The owner has a $1,000 deductible. That $800 now comes out of the owner's wallet. However, if the owner had a $100 deductible, the out-of-pocket expense would be only $100, providing a savings of $700.

  3. Is it better financially to have a low deductible and a higher premium?

    That depends. Someone with a low deductible/higher premium ratio can go through a 10-year period without filing an insurance claim. The person will end up having paid more money over that time in total premium than someone else with a higher deductible. Alternatively, a person can end up filing several insurance claims in just a few years.

  4. So how does someone decide which solution is best?

    Some questions to ask yourself include:
    1. Are you comfortable taking on some financial risk through a higher deductible or does this prospect make you uncomfortable?
    2. Do you have the financial means to pay the high deductible if you had to do so?

    If you are currently experiencing financial difficulties, it might seem that a high deductible is best because it will lower the total premiums. But if you are in an at-fault accident, will there be enough cash on hand to pay the deductible? A best practice is to create an emergency fund to cover the higher deductible before actually taking it.

  5. How does a person’s driving record affect the choice of deductible?

    The current thinking is the cleaner the driving record, the greater the consideration one should give to a higher deductible as it will lower premiums. On the other hand, for someone with a less-than-clean driving record, the person should consider taking a lower deductible, despite the additional premiums. You can also consider a program that rewards safe driving, like Nationwide’s Vanishing Deductible, which allows you to earn $100 off of your deductible for every year of safe driving.[1]

The bottom line is that choosing the right deductible takes time and consideration. A specialized insurance agent can help consumers make the best decision based on their driving record, current finances, credit record and overall financial planning goals.