Whether you’re comparing car insurance quotes or searching for the perfect premium to pay for your home insurance, keep in mind that the biggest payoff in terms of lower payments often comes from one simple maneuver: raising your deductible.
Before you instantly switch your insurance plan, though, you need to do a careful evaluation of exactly what this will mean to you financially. Determining an appropriate deductible depends on your tolerance for risk, your cash flow and your assets.
Essentially, your deductible represents self-insurance: every time you make a separate claim you’ll be required to pay the deductible out of your own savings. If you’re on a tight budget and want to pay the lowest possible premiums on your car insurance or your homeowners’ insurance, keep in mind that if you agree to a deductible of $500 or $1000, you’ll need that money available if have to make a claim. Even if you have the money on hand, you could find it painful to use it for something like a car repair or home repair.
Some consumers deliberately keep their deductible high as a preventive measure to keep themselves from making an unnecessary claim. If the amount you’ll receive from the insurance company is less than what you’re paying out of pocket, you may opt to pay the entire bill yourself.
Making fewer claims on your car or homeowners’ insurance can serve to keep your insurance rates more affordable, since most insurance companies raise their rates for customers who make frequent claims.
Variable savings on premiums
Your insurance company, whether you’re comparing quotes for auto or homeowners’ coverage, is likely to require a minimum deductible. The amount you’ll save on your premiums by adjusting the deductible depends on the type of coverage and the other factors that influence your rates, such as your driving habits, where you keep your car and the car itself.
You could save as little as $25 to $50 annually on your premiums by raising the deductible from $250 to $500 on your comprehensive coverage. On the other hand, if you’re a young driver with relatively high car insurance costs, your savings with a higher deductible could be as high as $250 or $300.
If you drive an older car, you may want to raise the deductible higher since you’re more likely to replace your car than repair it if it’s damaged in an accident. It’s best to compare an individual car insurance policy with several different deductibles before choosing the right one for you since the amount you’ll save depends on your personal circumstances.
Premiums for homeowners’ insurance vary according to your track record of claims, the volume and type of claims against the house by previous owners and the value and construction of your home. Raising your deductible from $250 to $500 or $1000 on a homeowners’ insurance policy can save you from $70 to $100 annually. However, keep in mind that some insurance companies already require a mandatory deductible of $1000.
To make your decision about an appropriate deductible for any insurance policy, you need to take the following steps:
- Figure out how much cash you have available for a car repair or home repair. It’s better to pay a little extra in insurance premiums and keep a lower deductible than to rely on your credit card to pay for a too-high deductible.
- Keep in mind that most deductibles are paid per claim, not on an annual basis, so if you have two or three claims in one year you’ll need to pay your deductible two or three times, too.
- Find out how much you’ll really save on your premiums by raising your deductible. If you only save $25 per year and your deductible has increased by $250, it would take ten years to recoup your extra costs through premium savings even if you only had one claim.
In the end, your deductible decision should be driven by an analysis of your available resources and the amount of money you’ll save on insurance premiums.