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A Quick and Easy Explanation of How Auto Insurance Deductibles Work

The word deductible in the insurance industry gets thrown around more often than a solo cup at a frat party. But – as if insurance weren’t already confusing enough in the first place – not all deductibles are created equal. For example, medical insurance deductibles and car insurance deductibles work in completely different ways. And it’s important understand exactly how your automotive insurance deductible works before you get into an accident or something happens to your vehicle. This not only helps you manage the claims process in a way that turns out in your favor, but it can also help you make decisions about your insurance policy that can save you money over time.

For starters, not every claim you file necessarily requires a deductible payment from you. With regard to liability coverage, for example, there is no financial responsibility for you to pay a deductible before your insurance company pays out your claim. As a matter of fact, you will most likely only have to pay a deductible if you are filing a claim against your Collision or your Comprehensive coverage.

If your vehicle gets into a collision with any other vehicle or object, the repairs to your vehicle will be paid for based on your collision coverage. The average deductible for this type of coverage is anywhere between $500 to $1,000, but you can adjust as necessary depending on how much you can afford to pay for your premiums.

Comprehensive coverage protects you from other incidentals – including theft, hail damage, fire, or other acts of nature. On almost all car insurance policies, the deductible for your Comprehensive coverage should be the same as the deductible for your Collision coverage. Many insurance companies combine these two coverages together for the sake of simplicity.

When the Deductible Amount Works in Your Favor

The lower your deductible is, the more you will save money in the event that you do have to file a claim. As we said, the average deductible that most drivers choose falls somewhere between $500 and $1,000 per claim – but in some states and with some companies, you may be able to choose a $250 deductible, or even qualify for what’s known as a “vanishing deductible”, which means you won’t owe any money on your first claim if you meet certain criteria. In the table below, you can see how much money you would end up saving if your vehicle sustained $7,500 worth of damages and you needed to file a claim to fix it.
 

Deductible Claim Amount Savings
$250 $7,500 $7,250
$500 $7,500 $7,000
$750 $7,500 $6,750
$1,000 $7,500 $6,500

Sounds a little too good to be true, doesn’t it? Just choose a lower deductible, and you won’t have to worry about your finances in the event that you get into an accident, or that something else happens to your vehicle. Unfortunately, it’s not that simple.

When Your Deductible Doesn’t Work in Your Favor

In case you haven’t noticed, insurance companies really don’t like spending money by paying out claims. It cuts into their profit margin, and since almost all insurance companies are private businesses, their bottom line is at the top of their priorities list. This means that there’s a trade-off when you choose a low deductible in order to save yourself money in the future. Your insurance company will charge you more in the short-term by increasing the amount of your premiums so that their financial burden will be less in the event that you have to file a claim.

This can be an expensive gamble if you are tempted to choose a low deductible despite the higher premium. If you’re a careful driver, and nothing happens to your vehicle, here’s how much you could end up spending just to make sure that the temporary financial hardship of a car accident doesn’t cause a detrimental inconvenience to your livelihood:

Monthly Premium Costs: Low vs. High Deductible Legend: Low Deductible Coverage High Deductible Coverage California Texas Pennsylvania Florida Illinois 20 40 60 80 100 120 140 160 180 200 220 240 260 $269 $211 $152 $119 $104 $81 $197 $154 $146 $114

 
But the graph above is only a snapshot of what it will cost you on your monthly premium. Over time, here’s how much you can end up spending for the sake of the lower deductible:

State 1 Year 5 Years 10 Years
California $702 $293 $585
Texas $396 $1,980 $3,960
Pennsylvania $270 $1,350 $2,700
Florida $513 $2,565 $5,130
Illinois $381 $1,905 $3,810

In one single year alone, you could end up spending between $270 – $700 just for the peace of mind of knowing that you will have a minimal financial burn if something happens to your vehicle. Over the life of your car, you could end up spending several thousand dollars or more – and if you end up never filing a claim, all of that money pretty much goes to waste.

Not to mention that having a low deductible is only really beneficial the very first time you file a claim with your insurance company. After that, your rates will go up and you will be spending more in premiums than you already are. And keep in mind that you have to pay your deductible every single time you file a claim, in addition to expecting a higher monthly premium after your claim is processed.

Now, if you can afford it, and you really are concerned about what having a damaged or totaled vehicle could do to your life, then the investment may very well be worth the reward. But if money is tight for you – like it is for so many people – and you consider yourself to be a very safe driver, then perhaps it’s better to put yourself at risk just a little bit with a higher deductible so that you can save money over the long-term.

If you think you’re paying too much for your monthly car insurance premium, we’re here to help. We can connect you with reputable companies who will give you a fair rate so that you can have the peace of mind knowing your property is protected. Comparison-shop with us today and see how much you can save.

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