It’s the most common insurance question: should I have a higher deductible or higher premium? Unfortunately, the answer is never cut and dry. While raising your deductible will lower your premium, there are other effects to consider for your auto insurance costs.
Let’s take a look at all the factors you should consider when choosing your auto insurance deductible!
What is a deductible?
A deductible is the amount you pay out of pocket when you make a claim. Deductibles are usually a specific dollar amount, but they can also be a percentage of the total amount of insurance on the policy.
For example, if you have a deductible of $1,000 and you have an auto accident that costs $4,000 to repair your car. You will have to pay $1,000 out of pocket as your deductible, and then your insurance would cover the additional $3,000 (or up to your coverage limit). Your insurance company would then likely send you a check for the amount of the claim minus your deductible.
Deductibles are used as a way to share the risk between the policyholder and the insurance company. If you weren’t required to have a deductible, you could technically have as many accidents as you wanted on the insurance company’s dime. Paying a deductible ensures you also have a stake in any claims you make.
Deductibles usually only apply to damage to your own property, like in the cases of comprehensive and collision auto insurance. Liability coverage usually doesn’t have a deductible; your insurance company will often pay out the entire cost (up to your coverage limits) if you have to pay for another party’s medical bills or damaged property.
What is the relationship between the deductible and premium?
Most often, a lower deductible means higher monthly payments. If you have a low deductible, you have more coverage from your insurance company and you have to pay less out of pocket in the case of a claim. A higher deductible means a reduced cost in your insurance premium.
For example, say your policy has a line of $5,000 in coverage. A low deductible of $500 means your insurance company is covering you for $4,500. A higher deductible of $1,000 means your company would then be covering you for only $4,000.
Since a lower deductible equates to more coverage, you’ll have to pay more in your monthly premiums to balance out this increased coverage.
A survey commissioned by InsuraQuotes found that an increase in deductible from $500 to $1,000 had an average of 8-10% reduction in premium costs. This was dependent upon the state, though, where Michigan only saved 4% for the deductible raise while Massachusetts saved an average of 17%.
But some people make the mistake of choosing the highest deductible just to save money on their premium. In the case of an incident, though, having a high deductible could have serious financial consequences.
Although $1,000 is often considered an average deductible, it’s becoming more common for individuals to mitigate their risk by opting for lower deductibles of $500 or even $250.
So how do you know which deductible is right for you?
What factors should you consider when choosing a deductible?
1. Could you afford a higher deductible in the case of an incident?
What does your emergency fund look like? If you have a $1,000 deductible, you would then have to pay that $1,000 in the case of a claim.
Could you pay that money out of pocket in order to repair your car? If the answer is no, you’ll want a lower deductible to ensure you are not left without in a bind to repair your automobile. If you have that money on hand at any point, it might be worth opting for a higher deductible.
2. What is the payback?
Do the math with your insurance agent. How much would you save on a lower premium if you had a higher deductible? Would you save money that would equate to that deductible in the case of an incident?
For example, lets say that changing from a $500 to $1,000 deductible would save you 10% on your annual premium. Your annual premium for the $500 deductible would have been $800, but with the $1,000 deductible the premium is instead $720.
Now you have an increased deductible by $500, but you are saving $80 per year. That means you would need just over 6 years in order to make up the difference. If you don’t get into an accident in those 6 years, the increased deductible was worth it. If not, you have to pay more out of pocket.
This is a basic form of the math. Work with an insurance agent to take your other deductible variables into account as well.
3. How often do you have accidents?
If you have a lot of accidents and claims, you’ll want a lower deductible. This means you’ll have to pay out less each time you have a claim.
If you have a good driving record, a higher deductible could work in your favor. You’ll save money on the premiums, which you could use towards your deductible in the case of a claim. For example, a driver who hasn’t had an accident in 20 years might not be scared by the above example of the 6-year time period to make up the difference. They might opt for a higher deductible because they feel they have a lower risk of collision.
4. How risk averse are you?
Ultimately, a higher deductible is a higher risk. The lower your deductible, the more coverage and security you have. How much are you and your family willing to risk?
5. What is the value of your vehicle?
Expensive vehicles cost more to insure. In this case, a high deductible might make sense because you would have higher savings on your premiums.
On less valuable cars, you may not want a high deductible because the cost to repair damage might not equate to your deductible. For example, if you have a $1,000 deductible and your used car needs a total repair of only $600, you would pay that entire amount out of pocket. Your insurance wouldn’t pay for anything.
Additionally, a lower value car will have a lower cost of insurance. In this way, the price difference between a $500 deductible and $1,000 deductible wouldn’t offer significant premium savings.
6. Are you leasing or financing your car?
People who are leasing or financing their car tend to choose a lower deductible. This provides better coverage in the case of a claim. This is necessary for people who don’t own their car, because they are responsible for returning the car in working condition no matter what—with or without the financial help of insurance.
7. Can you mix and match deductibles?
If you’re a good driver, you might be able to offset costs by having a high deductible for collision and low deductible for comprehensive. This ensures a high line of coverage for unexpected incidents and “acts of God” under your comprehensive coverage. Plus, comprehensive is usually a cheaper coverage policy.
You would offset the raised comprehensive premium cost by holding a higher deductible for collision insurance. Collision policies cover those costs if your vehicle hits a car or other car. If you don’t get in a lot of accidents, you can take the risk with a higher deductible.
Nevertheless, to keep it simple, you may want to hold the same deductible for all types of coverage and cars.
The Bottom Line
Don’t start raising your deductible just because you can’t afford the monthly or annual payments. There are other ways to lower your premiums, like shopping around and bundling your auto and home insurance. Click here to learn about the 16 ways to lower your auto insurance premium.
If you couldn’t afford to make your deductible tomorrow, you need a lower deductible. If you’re a good driver with a high tolerance for risk, you can raise your deductible.
But you don’t need to make the decision on your own.
Start comparing auto quotes right now to determine the deductible-premium relationship for your auto insurance.
Still not sure what’s the right solution for you? Contact one of our InsuraMatch experts to find the most economical and secure choice for your auto insurance!