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:
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.
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.
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.
So how does someone decide which solution is best?
Some questions to ask yourself include:
- Are you comfortable taking on some financial risk through a higher deductible or does this prospect make you uncomfortable?
- 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.
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.
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.