If you were in a minor car accident on your way home from work, how might it impact you financially? Given that today’s new vehicles cost nearly $50,000 on average, even a minor fender bender could realistically cause several thousand dollars in damage. Could you afford it? While the answer might be a tentative “yes,” you’d likely be able to answer with more certainty if you have a solid car insurance policy in place. Car insurance exists to safeguard you against the financial impact that paying out of pocket for repairs could have.
Although vehicle insurance is essential for mitigating the potential high cost of repairs following an accident, you’ll likely still need to pay an amount of money before your insurer begins covering the cost of a claim. This amount is called a deductible, and understanding what deductibles are and how they may affect your finances and insurance policy is an important part of being a responsible vehicle owner.
What Is a Car Insurance Deductible?
A deductible is the amount of money you pay out of pocket for car repairs or replacement following an accident before your insurance policy kicks in and begins covering those costs. If that fender bender costs $5,000 in repairs and you have a $1,000 deductible, your insurance company will pay $4,000 towards repairs after you make your $1,000 deductible payment.
An insurance company looks at deductibles as protection against frivolous claims. At the time you set up your policy, you’ll choose and agree to a deductible that establishes a prerequisite payment for filing certain types of claims.
Many insurance companies simply subtract the deductible from the final claim payout. For a $5,000 repair bill from an auto body shop, they may first subtract your $1,000 deductible and write a check for the $4,000 remainder.
If the deductible is more than the repair, you’ll pay for the entire repair out of pocket. This means the insurance company won’t offer a payout, and you may not need to file a claim. Consider your options carefully before you file, as this can impact your future coverage and policy amounts.
Not All Car Insurance Has Deductibles
When you purchase a car insurance policy, it may come with several different coverage types. You can also add additional coverage types, depending on your unique situation. Each coverage comes with its own guidelines.
Liability insurance covers damages you cause to another person or their property in an accident, and it typically doesn’t have a deductible. Collision insurance covers damage to your vehicle in the event of an accident, no matter who’s at fault. This type almost always has a deductible that will vary depending on your choices and premium.
Other coverage types that usually have deductibles include:
- Comprehensive, which covers damage from events out of your control, like floods or vandalism
- Personal injury protection, which covers medical expenses for you and your passengers
- Uninsured motorist property damage, which covers costs after an accident with an uninsured driver or a driver who doesn’t have a policy with high enough coverage limits
How Car Insurance Deductibles Impact Premiums
In general, the higher your car insurance deductible is, the lower your monthly insurance premium is. By taking on a higher deductible, you’re willing to pay more out of pocket if you need to make a claim. The insurance company charges you less because you take on increased risk and are willing to pay for more damage in the event of an accident.
Lower deductibles mean you won’t have to pay as much out of pocket if you’re involved in an accident. You can expect to pay more towards your monthly premium for this coverage.
No matter which you choose, it helps to select your deductible level as a tool to receive better financial coverage. Does it make sense for you to pay a little more each month to lower your risk in the event of an accident? Would a high deductible payout be a strain on your budget? Take your car’s value into consideration as you finalize your decision as well.
How to Choose Your Car Insurance Deductible
The average car insurance deductible varies between $100 and $1,000 or more. Small changes — like adjusting a comprehensive deductible from $500 to $1,000 — can impact your premium and how affordable it is for you. With so many choices, how do you know what to choose? Start by asking yourself a series of questions.
Do I Want to Pay More for Premiums or Repairs?
Higher deductibles will generally lower your premiums. Higher premiums mean a lower deductible if you’re in an accident and need car repairs. If you have a clean driving record with few accidents, the higher deductible may be appealing. A lower deductible may be the way to go if you’re looking for more stable financial control overall.
How Much Can I Afford to Pay Out of Pocket?
Would a high deductible derail your monthly budget? Shifting the burden to higher monthly premiums may give you better peace of mind. Before you select your deductible, decide how much you could afford to pay if you had an accident. Use that to guide you in choosing the right deductible level for your situation.
Does My Auto Lender Have Requirements?
If you’re still making monthly payments to lease or purchase your vehicle, the lender may have requirements about the maximum deductibles you’re allowed to carry for comprehensive and collision. Check the fine print of your loan paperwork, and contact your auto lender for more details.
What’s My Risk Level?
Look to your past to determine your future. Have you made claims before? While there’s never a guarantee of future behavior, it can be a sign of your risk level to insurance companies. You might have minimal risk if you work from home and your car sits in your garage for a majority of the time. If you drive every day and live in an area susceptible to extreme weather, however, your odds of filing a claim increase. These factors can influence your premium amounts, and, in turn, that may impact the deductible amount you choose.
Selecting the right deductible takes thoughtful consideration to ensure you make the right choice for your financial situation. Working with your insurance agent can help you make your best decision based on your credit record, finances, and overall financial goals.
Resource Links
“What is a car insurance deductible?” via Progressive
“Car Insurance Deductibles” via WalletHub