High or Low Car Insurance Deductible: Which Do You Want?February 23, 2015
Having a high car insurance deductible is smart, money experts will tell you, because your monthly payments will be lower. “Good deal,” you think, and so you opt for the $1,000 deductible.
Then you hit a telephone pole while backing out of a parking space. When you take your car to the body shop for a quote, you realize you’re on the hook for paying the entire cost of repairs. How is this a good deal?
When you’re weighing high or low deductible car insurance, you have to consider a few factors, including your finances, your driving record and your premium costs. We’ll help you choose.
What Is a Car Insurance Deductible?
Your auto insurance deductible is the amount you pay out of pocket when you make a claim. If a broken windshield costs $400 to replace and your deductible is $250, you’ll pay $250 and your insurer will pay $150.
Deductibles are annoying. Why can’t your insurance company just pay the whole cost? A deductible represents “a sharing of the risk between the insurance company and the policyholder,” according to the Insurance Information Institute. In other words, you might be more careful about parallel parking if you know you’ll have to pony up $500 for repairs to your bumper.
A car insurance deductible typically applies only to the parts of your policy concerning damage to your property: comprehensive and collision coverage. Liability coverage has no deductible. So if you hit someone else at a red light, your insurance will pay the entire cost (up to your coverage limits) of repairs to the other driver’s vehicle.
The Pros and Cons of a Low Car Insurance Deductible
Having a low car insurance deductible gives you peace of mind, especially if you’re on a tight budget. If your finances would be seriously rocked by an unexpected $500 or $1,000 expense, play it safe and opt for a low deductible, such as $250. You’ll pay more in monthly premiums, but you won’t have to panic if something happens to your car. If you have a history of getting into car accidents (no judgment!) a low deductible car insurance policy is probably smart.
You’ll also want to opt for a lower deductible if you’re leasing or financing your car. Most lease/finance agreements mandate a deductible of $500 or less, according to personal finance blog Get Rich Slowly. If you’re driving a beater car, you may even drop your collision and comprehensive coverage entirely. No coverage, no deductible.
The Pros and Cons of a High Car Insurance Deductible
The biggest reason to go with a high auto insurance deductible? It lowers your monthly premiums, sometimes dramatically. The Insurance Information Institute calculates that raising your deductible from $200 to $500 can reduce your premiums by 15 to 30 percent. Double your deductible to $1,000 and you could save 40 percent.
These numbers sound good, but remember they’re just estimates — and the savings only apply to premiums for collision and comprehensive coverage. To determine if high deductible car insurance will save you a significant amount of money, you’ll have to run the numbers. Use Compare’s free auto insurance quote tool to play around with your deductible amounts and see how they affect premiums.
Then, do a little more math. How long will it take for your annual savings to equal the cost of your high deductible? Say you’re saving $50 per year on premiums for raising your deductible from $250 to $500, but then you have to make a claim. It’ll take five years for your savings to equal the $250 you spent. On the other hand, if you decline to make an insurance claim and just pay for everything out of pocket, your insurance premiums may remain lower in the long run.
The best middle ground, according to Bankrate, may be choosing a high deductible for your collision coverage and a low deductible for comprehensive. Why? If you’re a good driver, you can reduce your accident risk; but the random acts of weather and vandalism covered by comprehensive can happen to anyone.