Selecting a deductible is one of the most important things to consider when comparing coverage across insurance companies. A high-deductible car insurance policy brings different financial consequences than a policy with a low deductible.
What exactly is a deductible? If you file a car insurance claim after an incident, the deductible is the amount you pay out of pocket before your insurance carrier starts paying for repairs. You will have to pay the deductible each time you file a claim.
For example, if you have a $3,000 repair and a $1,000 car insurance deductible, you would be responsible for paying $1,000. After paying the deductible, the insurance company would pay the remaining $2,000. However, if the repair costs less than the deductible, you’ll pay the entire bill.
You get to choose your deductible when you buy your policy. Policies with lower deductibles have higher premiums but lower out-of-pocket costs if you file a claim. And policies with higher deductibles have lower premiums but higher out-of-pocket costs if you file a claim. This is known as the seesaw effect.
With deductibles traditionally ranging from $500 to $2500, how do you choose which is best for you?
- Choose whether you want a low deductible and higher premium or vice versa. A low deductible is better if you want to avoid a large bill after filing a claim. But your monthly rates will be higher. A high deductible is better if you want lower monthly costs. But if you file a claim, you’ll pay more out of pocket.
- Calculate the cost difference. What would you save annually? For example, if you had a low deductible of $250 and paid $200/month for your premium, the cost is $2400/year for insurance. If you had a high deductible of $1000, your premium might be lowered to $90/month or $1080/year for a savings of $1320. If you don’t have to make a claim, you’re way ahead of the game. But what if you have to make at least one claim? With a low deductible, you’ve paid $2400 for your premiums plus $250 for the deductible for a total of $2650. If you make one claim with a high deductible, you’ll pay $1080 for your premiums plus $1000 deductible for a total of $2080. For two claims, a low deductible would cost you $2900, while a high deductible would cost you $3080.
- How likely are you to file a claim? What is your driving history? Are there new drivers in your household? A low deductible is better if you’re more likely to have an accident.
- Determine the value of your car. Most insurance companies will only pay up to the actual cash value of your vehicle if the insurer declares it a total loss. So, it’s generally better to have a lower deductible if your car isn’t worth much. Calculate how much your car is worth. Then compare its value to your insurance policy costs.
- Evaluate your cash savings. If you get into a car accident and you’re at fault, you’ll have to pay your deductible before the insurance company starts chipping in for repairs. If you don’t have savings or an emergency fund to cover a high deductible, it may be better to choose a low-deductible policy.
- What’s your tolerance for risk? Choosing a high-deductible plan is a gamble that you won’t have a car accident. If you have an accident with a high-deductible policy, you’re still covered. But you’ll pay more out of pocket after the accident than if you had a low-deductible policy.
Do you need help navigating your way through the insurance maze? Call Sharp Auto Body at (847) 526-1343, a shop you can trust!
