Car Insurance Deductibles Explained

What is an auto insurance deductible?

A car insurance deductible is the amount of money you agree to pay out of your own pocket for car repairs or replacement after an accident. If you are involved in an accident causing $5,000 of damage to your vehicle, and you have a $500 deductible, the insurance company should pay $4,500 of the claim while you are responsible for $500.

Your insurance deductible amount is something you will determine with your insurance agent or carrier before finalizing your auto insurance policy. However, you should have the option to change your deductible at any time.

Video

Five questions to help you choose the right car insurance deductible

In determining the right deductibles, here are five questions to consider before making the decision:

  1. 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.

  2. 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.

  3. 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.

  4. 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.

  5. 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 comprehensive and/or collision deductible for every year of safe driving. Up to $500 total.1

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.

1 , Accessed December 2021.

When Do You Pay an Auto Insurance Deductible?

Anytime you go to your own insurer to file a claim for damage to your covered automobile, a deductible will apply – whether you are at fault or not. Deductibles most commonly apply to comprehensive and collision coverage, but there may be a deductible for Personal Injury Protection (PIP) coverage or uninsured/underinsured motorists property damage coverage as well.

Factors to consider when choosing a car insurance deductible

There are several things to consider when choosing your car insurance deductible amount. We have covered some of them here:

Do you want to pay less for car insurance or repairs?

A higher deductible will generally lower your insurance premium, but you will pay higher out-of-pocket costs if you file a claim for damage to your vehicle. Some claims may even be covered under your deductible and you will have to pay the entire amount out of pocket. For example, if you back into a tree and do $350 worth of damage to your vehicle and your collision deductible is $1,000, you will pay out of pocket for all the repairs.

If you opt for a lower deductible, your car insurance premium will likely be higher, but you will have fewer costs if you file a claim. If your deductible is $100 and you cause that $350 damage by backing into a tree, you only have to pay your $100 deductible, while your insurance will pay the other $250. However, you could spend more on your premium by having a lower deductible and never end up filing a claim. This is the nature of having insurance coverage and an example of the risk both you and the insurer take on.

How much can you afford to pay out of pocket?

Before you choose a deductible, it is important to figure out what you can afford to pay if your car is damaged in an accident. If that amount is $500, you probably should not choose a deductible higher than $500. If you do, you may not be able to afford to fix your vehicle if you are at fault and need to pay the deductible for repairs.

Learn more: The cheapest car insurance companies

Does your lender have deductible requirements?

If your vehicle is financed or leased, you will probably need to carry comprehensive and collision coverages for your vehicle. If that is the case, you will need to choose deductibles for each. Some lenders will have a maximum deductible that you are allowed to carry for comprehensive and collision. It is important to check with the financial institution that handles your loan or lease to determine if these restrictions exist.

Personal injury protection (PIP)

This coverage is only available in certain states. It pays your (or another covered driver’s) reasonable and necessary medical expenses for treatment caused by an auto crash. It may also pay for:

  • Rehabilitation
  • Lost earnings
  • Replacement of services (e.g., child care if a parent is disabled)
  • Funeral expenses

The coverage varies by state and specific policy.

High vs. low car insurance deductibles

In most cases, you can choose whether you want to pay a higher or lower deductible for car insurance. Car insurance deductible amounts typically range from $100 to $2,000. The most common deductible our drivers choose is $500, but there’s no wrong choice. Ultimately, it comes down to what you prefer:

Higher deductible = Lower car insurance rate and higher out-of-pocket costs Lower deductible = Higher car insurance rate and lower out-of-pocket costs

Choose an auto deductible amount you’re comfortable with, and make sure you can afford to pay your deductible out of pocket in the event of a claim. It’s also important to consider your driving history and the likelihood of filing a claim. You may opt for a higher car insurance deductible because you’re betting against having an accident, but if you’ve had accidents in the past and often drive on busier roads, you may be more likely to file a claim and pay a deductible.

What factors should you consider when choosing a deductible?

1. Could you afford a higher deductible in the case of an incident?

What does your emergency fund look like? If you have a $1,000 deductible, you would then have to pay that $1,000 in the case of a claim.

Could you pay that money out of pocket in order to repair your car? If the answer is no, you’ll want a lower deductible to ensure you are not left without in a bind to repair your automobile. If you have that money on hand at any point, it might be worth opting for a higher deductible.

2. What is the payback?

Do the math with your insurance agent. How much would you save on a lower premium if you had a higher deductible? Would you save money that would equate to that deductible in the case of an incident?

For example, lets say that changing from a $500 to $1,000 deductible would save you 10% on your annual premium. Your annual premium for the $500 deductible would have been $800, but with the $1,000 deductible the premium is instead $720.

Now you have an increased deductible by $500, but you are saving $80 per year. That means you would need just over 6 years in order to make up the difference. If you don’t get into an accident in those 6 years, the increased deductible was worth it. If not, you have to pay more out of pocket.

This is a basic form of the math. Working with an insurance advisor will take your other deductible variables into account as well and help you arrive at a better decision. Call (844) 819-2221 to speak with one of our advisors.

3. How often do you have accidents?

If you have a lot of accidents and claims, you’ll want a lower deductible. This means you’ll have to pay out less each time you have a claim.

If you have a good driving record, a higher deductible could work in your favor. You’ll save money on the premiums, which you could use towards your deductible in the case of a claim. For example, a driver who hasn’t had an accident in 20 years might not be scared by the above example of the 6-year time period to make up the difference. They might opt for a higher deductible because they feel they have a lower risk of collision.

4. How risk averse are you?

Ultimately, a higher deductible is a higher risk. The lower your deductible, the more coverage and security you have. How much are you and your family willing to risk?

5. What is the value of your vehicle?

Expensive vehicles cost more to insure. In this case, a high deductible might make sense because you would have higher savings on your premiums.

On less valuable cars, you may not want a high deductible because the cost to repair damage might not equate to your deductible. For example, if you have a $1,000 deductible and your used car needs a total repair of only $600, you would pay that entire amount out of pocket. Your insurance wouldn’t pay for anything.

Additionally, a lower value car will have a lower cost of insurance. In this way, the price difference between a $500 deductible and $1,000 deductible wouldn’t offer significant premium savings.

6. Are you leasing or financing your car?

People who are leasing or financing their car tend to choose a lower deductible. This provides better coverage in the case of a claim. This is necessary for people who don’t own their car, because they are responsible for returning the car in working condition no matter what—with or without the financial help of insurance.

7. Can you mix and match deductibles? 

If you’re a good driver, you might be able to offset costs by having a high deductible for collision and low deductible for comprehensive. This ensures a high line of coverage for unexpected incidents and “acts of God” under your comprehensive coverage. Plus, comprehensive is usually a cheaper coverage policy.

You would offset the raised comprehensive premium cost by holding a higher deductible for collision insurance. Collision policies cover those costs if your vehicle hits a car or other car. If you don’t get in a lot of accidents, you can take the risk with a higher deductible.

Nevertheless, to keep it simple, you may want to hold the same deductible for all types of coverage and cars.

How deductibles work

For dollar amount deductibles, a specific amount would come off the top of your claim payment.

For example, if your policy states a $500 deductible, and your insurer has determined that you have an insured loss worth $10,000, you would receive a claims check for $9,500.

Percentage deductibles generally only apply to homeowners policies and are calculated based on a percentage of the home’s insured value. So if your house is insured for $100,000 and your insurance policy has a 2 percent deductible, $2,000 would be deducted from any claim payment. In the event of the $10,000 insurance loss, you would be paid $8,000. In the event of a $25,000 loss, your claim check would be $23,000.

Note that with auto insurance or a homeowners policy, the deductible applies each time you file a claim. The one major exception to this is in Florida, where hurricane deductibles specifically are applied per season rather than for each storm.

Deductibles generally apply to property damage, not to the liability portion of homeowners or auto insurance policies. To use a a homeowners policy example, a deductible would apply to property damaged in a rogue outdoor grill fire, but there would be no deductible against the liability portion of the policy if a burned guest made a medical claim or sued.

 

How To Choose A Car Insurance Deductible

Now that you know what a car insurance deductible is, it is important to choose the right deductible for your situation. 

When To Choose A High Insurance Deductible

You should choose a high car insurance deductible if you want to lower your monthly bill and if you have the ability to pay it. That last part is important. If you don’t have any savings, it’s not a smart idea to have a high deductible.

You might be the best driver in the world, but you still share the road with bad drivers and uninsured motorists. According to the Insurance Information Institute, about 6 percent of drivers who had collision coverage filed a claim in 2018. As we mentioned above, you might have to pay a deductible to fix your car even if you weren’t at fault. You can always choose a lower deductible while you save up an emergency fund and then raise the deductible later on.

When To Choose A Low Insurance Deductible

You should choose a low car insurance deductible if you don’t have the ability to pay a high one, or if you want to protect your out-of-pocket costs. A low deductible could be a good idea if you live in a congested area where you have a higher chance of experiencing an accident.

A $1,000 deductible is usually the sweet spot for savings. Bumping a $500 deductible up to $1,000 will give you a better discount than increasing a $1,000 deductible further to $2,000. Choosing a $250 deductible over a $100 one will also save you a significant chunk of money.

Comprehensive

This coverage helps pay for loss of or damage to an insured, covered vehicle that is not caused by a collision or vehicle rollover. Examples of this type of damage or loss include:

  • Fire
  • Wind
  • Hail
  • Flood
  • Vandalism
  • Theft
  • Hitting an animal

Comprehensive coverage on your auto insurance usually requires a deductible but certain policies may have no deductible.

How does a car insurance deductible work?

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.

Comprehensive coverage protects your vehicle from theft and damage not caused by a collision. The deductible on your policy will apply if you file a claim for damage covered by comprehensive, however there are some instances in which you don’t have to pay a comprehensive deductible. For example, cracks or chips in your windshield may be paid in full by your insurance company depending on the state you live in.

Collision coverage pays the costs of any damage to your vehicle caused by a collision with an object when you are at-fault. Any claim you file for damage that is covered by collision will be subject to a collision deductible.1

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.

Our Trusted Carriers

We work with over 50 leading national and regional insurance companies to provide you with choices you can trust.

... and more! ... and more! ... and more!

… and more!

Call (844) 232-2700 to compare quotes today!

Tags