Car Insurance Deductibles
If you've done any research on what impacts the price of car insurance, you probably know that your auto insurance deductible is the largest controllable factor, aside from coverage type, affecting the premiums you pay. Most drivers are also aware that if they raise their auto deductible, their insurance premiums will drop as a result. While many policyholders can benefit from higher deductibles, others may be better served by either keeping the same deductible or lowering it. Read on to determine which strategy best suits your financial status and driving habits.
What Is a Deductible?
An insurance deductible is the portion of the bill for which you are responsible in the event of a covered loss, such as an accident or a theft. Your insurance company deducts the amount from the settlement you receive, which explains its name. Common denominations for deductibles include $0, $100, $500, $750, $1,000, and $1,500. Because you assume a larger share of financial responsibility with a higher deductible, insurers offer lower premiums to policyholders with more substantial deductibles.
Pros and Cons of Higher Deductibles
On the bright side, if you adjust your deductible upward, you will see a considerable drop in your annual premium. The higher you set your auto insurance deductible, the lower your premiums will be. Another factor that militates in favor of a higher deductible is that having to pay a deductible is not a certainty because you may not ever have an accident or other claim. On the other hand, premiums are an absolute certainty - you have to pay your premiums in order to maintain coverage. Thus, it may make sense to take more of a financial risk with your auto deductible than with your premiums by erring on the high side.
Conversely, setting your deductibles too high can have disastrous consequences if you're not financially equipped to pay them after a covered loss occurs. You may have saved money on your premiums by setting the deductible very high, but you will probably lose all those savings and then some if a loss actually happens. If you've set your deductible so high that you cannot afford to pay it, you will not be able to get your car replaced or repaired until you can come up with the money.
Insurance Deductible: To Adjust or Not to Adjust
Two factors will determine whether you should adjust your deductible: your finances and your driving patterns. Financially, look at your monthly budget and savings and realistically assess if you could pay the deductible you've chosen comfortably. If not, the financially sound decision is to lower your deductible to protect yourself in the future. If you can, you might want to further examine your finances to see if you could absorb an even higher deductible. Also consider your driving record in setting deductibles. If you have accidents fairly regularly, a high deductible is more dangerous than if you've had a clean driving record for years.