Understanding Insurance Deductibles
“Deductible” is the term for how much you pay out of your own pocket when you are in an accident or something happens to your vehicle. Depending on your coverage, how much the damages cost, and your coverage limits, your insurance will pay for the rest of the repair costs after “deducting” your deductible.
For example, if your deductible is $1,000 and the total repair cost is $10,000, you will have to pay your $1,000 deductible and then they will cover for the rest of the repair. If you choose not to repair your car after filing a claim, then they will send you a check for the cost of the repairs minus your deductible.
The cost of your deductible is related to how much you pay for your premium. Lower deductibles result in higher premiums, and higher deductibles result in lower premiums. Some plans, though rare, also offer no deductible for much higher premiums. Essentially, deductibles are your share of the bill. By showing you are willing to cover for some of the repairs, your insurance will compensate you with lower premiums.
How do you choose between having a higher deductible or paying higher premiums? While there’s studies that show how much the average American driver can save from having higher premiums, the best option depends on your own circumstances.
If you are prone to car accidents, higher premiums might be better for you, so you will not feel as much as a hole in your wallet when you have an accident. Alternately, if you are generally a safe driver and are not likely to be in one, a higher deductible might be better for you since you’ll rarely end up paying it. However, you want to make sure that you can afford to fully pay your deductible on the off chance that you’ll need to.
Remember to take your earnings and savings in account. For those who do not have much extra income to work with, paying lower premiums month to month can seem enticing but will leave you hurting when it’s time to pay your deductible. Lower premiums can end up saving you more over a longer period of time and paying the deductible shouldn’t be an issue if you put those savings aside for your deductible, but until you accumulate those savings, a high deductible can carry a heavier weight than higher premiums.
Your car’s worth plays a role as well. If your car is low in value, it might not be worth the deductible you will have to pay when you file a claim.
How do deductibles work?
If you are covered for those situations, if the cost of damages is more than your deductible, your insurance will cover the rest.
Deductibles come with collision and comprehensive insurance. You do not have to pay deductibles for liability coverage, where as long as it’s within your coverage limits, your insurance will cover the damages.
Collision insurance covers for crash related damages and comprehensive insurance pays for other non-collision related damages, such as from natural disasters, vandalism, and even animal-related incidents.
Paying Your Deductible
You pay for your deductible after you file a claim. If you choose not to repair your car after you claim, your insurance sends you back a check for the cost of the repairs minus your deductible.
Sometimes you won’t have to pay a deductible if it isn’t determined to be your fault. One con to this is that sometimes, finalizing who is at fault can take longer to process. That means your car stays unrepaired until it’s confirmed. If you cannot wait and do not mind paying, you can choose to file a claim, pay the deductible, and get your car repaired. And if later it is determined that the accident was not your fault, you can try to get your deductible back by having the responsible party reimburse you through their insurance or taking them to a small claims court.
In the scenario that the repairs are smaller than your deductible, do not file a claim. Pay for the repairs yourself. If the repair costs are also only a bit above your deductible and you can afford paying a bit extra, it will end up saving you more in premiums since claims can increase your rate.
If you have a car loan or are leasing your vehicle, you might be required to pay a deductible of a certain requirement when your car is damaged. Lease agreements generally ask for $500 or less, while loans
The relationship between premiums and deductible can be confusing, especially if you are unsure of what is best suited for you.
Low premiums, High deductibles
These are best suited for:
• Those who have enough in savings to pay their deductible and can do so comfortably
• Low-risk drivers with safe driving records and other circumstances that decrease their risk of being in an accident, thus won’t need to pay for deductibles very often
• Those more concerned about reducing their monthly expenses and accumulating savings where they can
According to Quadrant Information Services, by increasing your deductible from $500 to $1,000, you could save you up to 9 percent. From $500 to $2,000, you could save up to 16 percent. These numbers vary among different states.
High premiums, Low deductibles
Are ideal for those:
• Likely to experience hardship if they suddenly have to pay a large deductible, but still make enough to pay off their premium
• High-risk drivers and those with circumstances that make it more likely to experience an accident than other
• Owners of a car that values less than the cost of a higher deductible
Concern over monthly rates is a factor that can make choosing between higher premiums or a higher deductible hard to do. But one thing to also remember is that monthly premiums cost what they are because you’re paying month to month. Paying your premium annually or bi-annually could end up saving you money by cutting out additional expenses like service fees per payment, you can lock in your rate and don’t have to be worry about your rate going up, as well as qualify for discounts rewarded for paying upfront. If you can afford to do so, the amount of savings that end up accumulating can help make paying your deductible less of a concern. Even more so if you take additional precautions towards reducing your likelihood of experiencing or causing an accident and preventing non-collision damages of your car.
By understanding how your deductible functions and its relationship with your premium, you can make better informed decisions about what deductible works best for you, keeping your wallet secure and your well being protected when the unexpected happens.