Car insurance is essential for anyone who plans to drive their vehicles on the road. I mean, what good is a car that just sits in the garage? Not only does car insurance give you the confidence and security of a backup plan if anything should go wrong, but it is a requirement in nearly all 50 states. But not all car insurance is alike. Plus, the price you will pay if an accident should (gasp!) happen depends on your policy’s deductible. The deductible you choose will also affect how much you pay annually for your car insurance. Here we will detail how to get the most out of your car insurance deductible, plus everything else you should know.
So, how do you utilize your car insurance deductible to save on your annual car insurance premiums? The best ways to get the most out of your deductible are by understanding how a deductible works, which we will cover. You also need to know the effects of raising or lowering how much you pay out of pocket, the importance of finding the best cheap insurance companies and quotes, and why a higher credit score has an impact.
What is a car insurance deductible?
A car insurance 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. It can also be 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. (Note – homeowners’ insurance policies work the same way.) 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.
In general, the higher deductible you pay, the less the premiums will be that you 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. (Platforms like CarInsurance.net will do the comparison shopping for you, for free.)
How a Car Insurance Deductible Works
As we just 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 policies and even health care insurance. 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. This is just one thing you should be aware of when selecting your policies.
When to Choose a Higher Car Insurance 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 or emergency fund means you can confidently pay higher amounts out of 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. This is just one more reason to stash away some cash. You may have to pay your deductible to fix your car even if the accident was not your fault.
When to Pay a Lower Deductible
You should choose a lower deductible if you won’t be able to save enough cash. A car insurance deductible can range between $100 and $2,000. Most 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 a huge “ouch” factor. 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?
After an accident you will need to file a claim to your insurance company. 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. Here is a list of some of the options you have if you can’t afford a deductible.
Negotiate with your mechanic to waive your deductible or discuss a payment plan. This will help your fix your car and get back to the road. You can ay the remaining balance later or on a set schedule.
You do not have to use the mechanic your insurance company suggests. You also do not have to use the mechanic that provided the insurance company with the quote. If the repair quote costs too much, you can take your car to a different repair shop. Taking your car insurance check to another mechanic can help you land a more affordable repair deal.
If you get in an accident, and your vehicle or the vehicle of 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.
All About Your Car Insurance Deductible – Summary
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. These can include the average cost of car insurance, your driving history and record, and your financial status.
Choosing a higher car 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 an emergency fund. However, this increases your annual premiums.
Make the choice that fits your wallet and gives you peace of mind.
For more articles like this one detailing a car insurance deductible, visit the financial planning section of the site.