What is a Car Insurance Deductible?

By Gregory Hamel

  • Overview

    Shopping for a new car can be fun, but looking for insurance on a new car is not. Between all the different types of coverage and insurance companies, its often hard to understand what exactly one needs and what is a wasted expense. Deductibles are one important component of auto insurance, that should be used by a driver to get the best deal possible.
  • Definition

    A deductible in auto insurance works the same way as a deductible in health insurance, or any other type of insurance. It is an upfront payment that must be made by the driver before their auto insurance policy will step in and pay for damages. Basically, auto insurance companies realize that cars are very likely to suffer small accidents and damage that cost under $1000 to fix, so a deductible forces the driver to pay for such expenses out of their own pocket. Only when large amounts of damage are incurred, such a total wreck, will the damage exceed the deductible and force the insurance company to pay.
  • Premiums

    The price of an auto insurance policy depends largely on the level of deductibles a person chooses to have. If once opts for a low deductible of $250, they might end up paying twice as much for auto insurance as someone with the same car and driving record with a deductible of one or two thousand dollars. This means that choosing higher deductibles is a good way to reduce the cost of auto insurance premiums. Of course, this comes at the risk of having to pay more out of pocket for damage to the vehicle.

  • No Deductible

    Some auto insurance companies offer plans with no deductible at all. While it may seem great not to have to pay any money out of pocket for damage, a zero deductible plan will cost substantially more than one with a higher deductible. Usually the difference in cost is enough that the insured person would need to incur and claim small amounts of damage at least one if not more than once a year in order to make the zero deductible worthwhile. Since most people do not damage their car this often, a zero deductible is rarely useful.
  • Insurance Prices

    When buying an insurance policy, one might assume any damage that exceeds the deductible will automatically be covered by the plan. While any damage over the deductible is eligible for coverage, it is often in the driver's best interest not to make a claim. Any time a claim is made, the cost of the insurance plan is subject to possible increases. So while someone with a $500 deductible might be able to save $250 by claiming a small accident that caused $750 of damage, it might not be worth it due to the potential increase in premiums. In this way, a deducible often acts as an upfront payment of more than the stated amount.
  • Maximize Savings

    When it comes to auto insurance, a less is more strategy is usually the best way to maximize savings for safe drivers. Choosing higher deductibles is a good idea considering the fact that one will feel compelled to avoid price hikes by paying for damage themselves, unless that damage is extensive. A good rule of thumb is to choose deductibles as high as one can afford in the event of an accident. If you have $2000 socked away somewhere, go ahead and choose a high deductible. It will save money over time that will eventually equal the difference between the high deductible and a lower deductible. If you don't have extra cash, and couldn't live without your car, or replace it easily, a lower deductible might be necessary.
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