When you purchase car insurance, many decisions must be made regarding coverage. While most states mandate that you carry a set minimum of liability insurance to cover bodily injury and property damage to the other driver, the rest of the insurance decisions are up to you. What type of coverage do you want to have? What limits should you carry to protect yourself should you be involved in an accident? How much should your deductible be? How much of an insurance premium can you afford?
One way to save money on your car insurance premium is by having a higher deductible. But what does a higher deductible, low car insurance policy mean for you?
Types of Insurance Coverage
There are four main categories for insurance coverage, including:
Most states mandate that you carry minimum liability insurance to cover bodily injury and property damage. Bodily injury has a maximum per person and per accident limit, while property damage has a per accident limit. Many states require between $20,000 to $30,000 per person with $40,000 to $60,000 per accident in bodily injury, with $20,000 to $30,000 per accident of property damage.
You can carry more than the bare minimum amount required, and it could be wise to have a larger limit. Cars today can cost upwards of $25,000 to replace if you’re the at-fault driver that causes the other vehicle to be totaled. There is no deductible for liability coverage.
Uninsured/Underinsured Motorist Coverage
Some states mandate UM/UIM coverage, and others require insurance companies to offer it, but it’s your right to reject it. UM/UIM steps in if you’re involved in an accident with an at-fault driver who either lacks insurance or has insufficient coverage to pay your medical bills and damages. Each state determines whether UM/UIM has a deductible or not.
Collision coverage pays for damages to your vehicle if you hit an object or other vehicle. Collision coverage is optional in most cases unless you have a lien or lease on your vehicle and your lending agent requires you to carry it to protect the investment. Collision coverage has a deductible associated with its coverage.
Damage caused by acts of nature such as hail and theft or vandalism is covered by comprehensive insurance. Comprehensive is also optional unless required by a lending agent and includes a deductible.
What Is a Deductible?
A deductible is an amount you agree to pay out of pocket toward an insurance claim. For example, you have $9,000 in damages to your vehicle and a $1,000 deductible. In this situation, you’ll pay $1,000 for the repairs, and your collision or comprehensive will pay the remaining $8,000. The coverage that pays the balance depends on what caused the damage. You can choose your deductible when you purchase your car insurance policy. The most common car insurance deductibles are $500 and $1,000, but you can usually select any amount between $100 and $2,000.
Higher Deductible Equals Lower Premium for Car Insurance
When selecting a deductible amount, you’ll discover that the higher your deductible is, the lower your annual premium will also be. This decrease in rate is because you’re agreeing to pay more towards any potential damages with a higher deductible, which is appealing to car insurance companies. Vice versa, when you select a low deductible, you can expect to pay a higher premium because you aren’t taking on as much risk as your insurance company.
How Do You Pick a Deductible Amount?
You should consider a couple of factors when selecting your deductible amount:
- How much can you afford out of pocket if you have a claim?
- How much can you afford on your premium?
The best way to determine your deductible is to have your car insurance agent run the numbers for each deductible. You may find that the difference between a $500 deductible and a $1,000 one is only a few dollars more each month.
A key consideration is how much can you afford to pay out of pocket should you need to make a claim? If you’re involved in an at-fault accident, and your vehicle has $9,000, with a $2,000 deductible, your vehicle may have to sit in the shop until you can come up with the money. So, is it saving you anything if you don’t have enough savings to cover a $2,000 deductible?
Consider an out-of-pocket amount that you can afford when selecting your deductible. To save money on your premium, you’ll want this to be at your uppermost limit of what you can afford but something that won’t cause you to put off costly repairs because you don’t have the funds.
What Happens If You Can’t Pay Your Deductible?
If you opt for a high deductible and then have a claim, you may find yourself in a position where you can’t pay the deductible. Other than leaving your vehicle at the shop until you can come up with the money, you have several options to consider, such as:
- Discuss a payment plan with the repair shop.
- Try to get a better quote on repairs at another shop.
- Take out a personal loan.
- Consider asking friends or family to help pay your deductible
- Keep driving your car until you can afford to repair it; if you can still drive it
What Are Vanishing Car Insurance Deductibles?
Many car insurance companies offer vanishing car insurance deductibles to encourage drivers to keep a clean driving record. Each program works differently, but the idea is that a part of your deductible will vanish each year you don’t make a claim. Most companies issue this at $100 per year, so with a $1,000 deductible, if you have five years of a clean driving record, you can expect only to pay a $500 deductible should you need to make a claim.
Once you make a claim, some companies reset you back to your original deductible amount, while others may reset it to a smaller amount. These programs are not free, with most charging an annual fee on top of your insurance premium.
While a higher deductible means a lower premium for car insurance, you’ll want to ensure that it’s a deductible you can afford as well. Work with your car insurance agent to determine a deductible that works for you. Comparing deductibles, limits, and premiums will give you the best value for your money when it comes to car insurance.
At FIXD, our mission is to make car ownership as simple, easy, and affordable as possible. Our research team utilizes the latest automotive data and insights to create tools and resources that help drivers get peace of mind and save money over the life of their car.