Insurance policies often seem like a jumble of unfamiliar terms. Pinning down what these terms mean and how they affect your insurance rates can be frustrating, but we’re here to help — starting by explaining the term “deductible.”
What Is an Insurance Deductible?
An insurance deductible is the amount you must pay out of pocket before your insurance kicks in. You might have heard phrases like “meet your deductible” or “after your deductible.” With health insurance, you typically meet your deductible gradually as you pay for various appointments and services throughout the year. With home or auto insurance, you’re much more likely to meet your deductible in a single claim. In that case, your deductible literally gets deducted from the amount paid out by the insurance company.
For instance, suppose you are involved in a vehicle collision and your insurance company determines your vehicle has sustained $5,000 of damage. If your comprehensive or collision insurance policy includes a $500 deductible, the insurance company would write you a check for $4,500.
Deductibles vs. Premiums
When you’re shopping for car insurance, the terms “deductible” and “premium” often get mentioned together because they affect each other significantly. Typically, the higher your deductible, the lower your premium, and the lower your deductible, the higher your premium. The premium is how much car insurance costs. You can pay premiums annually, biannually, quarterly, or monthly.
Several factors affect your car insurance premium, including your age, driving record, and credit score. Some of these factors are within your control, and addressing them can result in lower rates. Most insurance companies even offer a variety of discounts, such as good driver, good student, and multi-policy discounts. However, you can also lower your premium by increasing your deductible.
Choosing between a lower deductible or premium is up to the policyholder. If your monthly budget is your biggest concern, and you have a long record of safe driving, you might feel comfortable risking a higher deductible. Just make sure you have enough money saved to cover whatever deductible you choose without jeopardizing your finances.
When Do You Pay a Car Insurance Deductible?
A car insurance deductible will apply to any claim filed through your collision, comprehensive, uninsured motorist property damage, or personal injury protection policy. These are the types of coverage that most commonly include a deductible. In most cases, the insurance company automatically applies your deductible when it issues your payout. Instead of you making a payment to the insurance company or writing the mechanic a check, the insurance company will send you a check for the approved claim amount minus your deductible.
Not all types of insurance include a deductible. One example is liability insurance, which covers the damage and injuries other parties sustain in accidents where you are the at-fault driver.
Let’s say you rear-end another vehicle at a stoplight. Because you are the at-fault driver, liability insurance will kick in to pay for the damage to the other car as well as any injuries to that driver or their passengers. In this case, you do not need to pay a deductible because liability insurance does not require one. However, you would have to pay a deductible if you also file a claim with your collision insurance for any damage to your own vehicle.
You also won’t need to pay a deductible in the following situations:
- You are not the at-fault driver. Whether you file a claim through the other driver’s insurance or through your own collision insurance, you will not need to pay a deductible. If you choose to go through your own insurance company, it will take care of negotiating with the other driver’s insurance company. This includes seeking reimbursement for your deductible. However, you might owe a deductible if both parties are equally at fault or if your uninsured/underinsured motorist insurance kicks in.
- You have a disappearing deductible. Some insurance companies offer a vanishing or disappearing deductible program. If you sign up for this program, your deductible will shrink over time as long as you avoid accidents and traffic violations. Keep your driving record clean long enough, and you’ll be rewarded with a $0 deductible. Just remember, this deductible will reset after you file a claim.
- Another person files a claim against your liability coverage. Regardless of who files the claim, liability car insurance coverage never requires the policyholder to pay a deductible. However, you might still have out-of-pocket costs if the claim exceeds the limits of your coverage. In that case, you can be held liable for the difference.
- You file a MedPay, uninsured motorist bodily injury, or windshield claim. Many insurers offer a $0 deductible for windshield repair or replacement or waive the deductible if your windshield can be repaired rather than replaced. Although you might be charged a deductible for property damage claims under your uninsured motorist insurance, bodily injury coverage generally does not carry a deductible. MedPay doesn’t charge a deductible, either.
What’s a Good Deductible for Car Insurance?
What qualifies as a good deductible depends on your perspective. For risk management, the best deductible is the lowest one you can afford. If you’re trying to trim your monthly expenses, the best deductible is the highest one you can afford. Remember, you can’t choose a deductible without also considering your premium. To demonstrate how your deductible affects your premium, Progressive lists the following hypothetical six-month costs:
- $100 deductible: $420
- $250 deductible: $300
- $500 deductible: $225
- $1,000 deductible: $162
- $2,000 deductible: $135
The most common deductible for car insurance is $500, which strikes a good balance for many drivers. However, a higher or lower deductible might make more sense depending on how likely you are to file a claim, how much your car is worth, and how much money you have saved for emergencies.
Choosing a deductible is important because of the direct impact it has on your car insurance rates. Before making a final decision, take the time to review your finances and talk things through with an insurance agent.
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.