When shopping for car insurance, you’re likely to hear the terms “premium” and “deductible.” Understanding these two terms can help you choose a cost-effective auto insurance policy to keep you and your vehicle protected. Here’s an explanation of the key differences between a car insurance premium vs. deductible.
What Is a Car Insurance Premium?
A car insurance premium is what you pay to an insurer to maintain a policy. Your car insurance policy will continue to be active if you keep making payments for your premium. Insurance companies require you to pay your premium at set intervals, such as monthly, quarterly, every six months, or annually.
Auto insurance companies calculate premiums for individual drivers using a variety of factors. According to the Insurance Information Institute, here are some factors companies may use to determine your car insurance premium:
Your driving record includes the number of accidents you’ve had, the traffic violations you’ve received, and the claims you’ve filed previously. You may have a lower premium if you’re a safe driver with few car accidents on your driving record. On the other hand, you may pay more for your premium if you’ve received several traffic violations or had an accident recently. You may also pay a higher premium if you’re a new driver because insurance companies have no data to understand your driving record.
The type of vehicle you drive can affect the cost of your car insurance premium. You may pay more for your premium if you have a brand-new car because it will cost more for insurance companies to repair or replace the vehicle if it’s damaged or totaled in an accident. Other factors related to your car that may affect your premium include its value, body style, the likelihood of theft, and safety features.
Often, where you live can determine the cost of your car insurance premium. If you live in a densely populated area, insurance companies may charge more to insure your vehicle because there’s a higher risk of being involved in an accident. Insurers may consider other factors related to your location when determining your premium, such as the rate of theft or vandalism and the average number of car accidents in your area.
Insurance companies typically consider your age when setting your premium rate. They view older drivers as less likely to get into an accident than younger drivers, who may not have as much experience on the road. Typically, teenagers and young adults under the age of 25 will cost more to insure than drivers in other age brackets.
What Is a Car Insurance Deductible?
A car insurance deductible is an out-of-pocket cost you incur if you file a claim after an accident. Typically, insurance companies require you to pay your insurance deductible before covering the rest of the repairs. For example, what happens if your car insurance policy has a $500 deductible and an accident causes $2,000 worth of damage to your vehicle? You will pay the $500 deductible, and your insurance will cover the remaining $1,500 balance.
When you purchase car insurance, different coverages typically have separate deductibles. Unlike health insurance, where you meet a single annual deductible, you usually pay a car insurance deductible each time you file a claim. According to WalletHub, the types of car insurance coverage that typically have deductibles include:
- Collision. You usually pay a deductible to use collision insurance, possibly ranging from $100 to $1,000. This insurance coverage pays to repair damages to your vehicle after an accident, regardless of who’s at fault.
- Comprehensive. Like collision insurance, the deductible for comprehensive insurance typically ranges from $100 to $1,000. This insurance covers damages to your vehicle in an event besides an accident, such as vandalism or weather damage.
- Personal injury protection. The deductible for personal injury protection (PIP) insurance can range from $100 to $2,500. Some states require this type of insurance, which covers medical expenses for you and your passengers after an accident.
- Uninsured motorist property damage. You may pay a deductible ranging from $100 to $2,000 for uninsured motorist property damage insurance. This type of insurance pays for any damages to your property after an accident caused by a driver who has insufficient insurance to cover the costs.
How Your Deductible Affects Your Premium
When you purchase a car insurance policy, you can choose whether you want to have a higher or lower deductible. Typically, the amount of your deductible directly affects your premium rate. If you choose a higher deductible, you will receive a lower premium rate, though you’ll pay higher out-of-pocket costs if you file a claim. If you choose a lower deductible, you’ll pay more for your premium, but you’ll incur lower out-of-pocket expenses after an accident.
When you choose your car insurance deductible, make sure it fits within your budget. If you’re ever involved in an accident or your vehicle becomes damaged, you want to know you can afford to pay your deductible so your insurance will cover the remaining repairs. Here are some factors to consider when you’re deciding on your car insurance deductible amount:
- Risk of an accident. If you feel you may be at higher risk of an accident because of where you live or your driving habits, you may want to have a lower deductible because you’re more likely to file a claim.
- Value of your car. You may choose a high-deductible plan if you drive a vehicle with a high value because it can help offset the cost of your premium. Conversely, if you drive an older car, you may choose a low-deductible plan because your vehicle may have a lower value, which means insurers will pay less to repair or replace it.
- Total deductible amount. Consider the full deductible amount you may pay after an accident for each type of insurance you have, such as collision and comprehensive. Evaluate your monthly budget and savings to determine a total amount you can reasonably afford.
Note how the deductible amount affects your premium rate the next time you shop for car insurance. By understanding the difference between a car insurance premium vs. deductible, you can make sure you’re choosing an insurance plan that fits your budget and lifestyle.
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.