The Deductible Decision With Your Car Insurance

by: Thomas Ajava

What is the number one thing everyone complains about when it comes to car insurance? The cost! It can seem like you are just flushing money away given the fact payments are being made each and every year. Adjusting your deductible is one way to address that.

Most coverages included in your car insurance will come with a deductible. What is a deductible? It is the amount of money you must first spend before the insurance will kick in and take care of the various bills produced from a claim. The typical deductible amounts you can choose from are $250, $500 and $1,000. The exact amounts may vary by the insurance company you are working with.

So, what deductible amount should you choose? $250 is considered the default deductible amount. Choosing $250 means you are going to have coverage for smaller events. Let's say someone busts out all the windows of the cars on your block including yours. Your new windows are going to cost more than $250 when installed. You'll have to pay the first $250 of the bill and the insurance company will then pay the rest. If your deductible is higher, say $1,000, you'll have to pay for the first $1,000 of the repair before the insurance kicks in.

Given this example, why would anyone every pick a deductible other than the lowest possible figure? The answer is found in the deductible - premiums relationship. Simply put, the lower your deductible, the higher your premiums. This makes sense for a logic perspective. A person with a deductible of $250 is far more likely to trip the insurance payout than someone with a $1,000 deductible. To "share the risk" the car insurance company cranks up your premiums.

What if we go in the opposite direction? What if we crank our deductible up to $1,000? Will we save money in the long run? It depends on your policy and your driving habits. Raising the deductible to $1,000 will lower your premiums between five and twenty five percent. If the figure is only five percent, it makes little sense to raise the deductible. A discount of twenty five percent is a different matter entirely! The other subtle issue is your driving history. If you've never had an accident and never made a claim, then raising the deductible really isn't very risk at all. If you are always dinging your car, it is. You'll just have to decide.

A common strategy used by many people is to raise their deductible as high as possible. At the same time, they save up $1,000 and set it aside in case it is needed. This approach lowers the premiums, which saves you money year after year after year.