Choosing a Deductible: Which is Right for You?

Can your deductible amount save you money? (Image by graphicmania.net)

Lots of things in life are out of, and simply beyond our control.  But many things fall directly under our control, such as the choices we make as we live our lives.  And the deductible on our car insurance policy is one such area we can and do have direct control over.  We’re going to look at what a deductible is, how deductibles come into play on policy claims and how you should make the decision on what amount of deductible to carry, what your deductible says to your insurer as well as the effect is has on the amount your policy costs and finally, our words of advice.

Just in case you’re an auto insurance newbie, the deductible is essentially the investment you’re willing to risk on the odds of being involved in an auto accident.  Before your auto insurer pays any claim, you will be paying out the amount of your deductible on any repairs or other claims you’ve made.

For example, you’re involved in an accident, and your car sustains $1,300 in damage.  Your deductible, for the sake of this example, is $1,000.  If you file a claim on the collision portion of your car insurance policy from this accident, you’ll pay $1,000 to the shop repairing your car.  Your auto insurer will pay out $300.  This example also provides us the chance to ask: “If I have to pay out $1,000, why not just pay all $1,300 and not risk an increase in my auto insurance rates or premiums?”

Let’s look at another example with much different circumstances, and a much different outcome.  In this one, your car is stolen and never recovered.  You have comprehensive coverage, so you’re covered.  Again, for the sake of this example, your deductible is $1,000.  Your car has an actual cash value (ACV) of $15,350 and a payoff amount of $7,110.  You’ll pay your $1,000 deductible, your auto insurance company will pay the lienholder $6,110 and pay you the remaining $8,240 in value on your car.  In this example, there is no question as to file a claim.  You pay your $1,000 deductible and get $14,350 paid out via your auto insurer.  You’ve effectively risked $1,000 to keep $14,350 –or- 93.5% of the value of your car.

Remember, the deductible is not only the investment you’re willing to put up – it’s the investment you’re willing to risk to lose.  In fact, deductibles are referred to in the insurance industry as “retained risk.”

Wikipedia defines risk retention as:

“Involves accepting the loss, or benefit of gain, from a risk when it occurs.”

Thus far, we’ve talked about both the loss side, as well as the gain (which is really more of retained) side of auto insurance deductibles.  But we’ve not discussed all of the potential gain to be had, not even close.

Your deductible amount allows your insurance company to share its risk on your policy.  Since you’re a primary element in how big a risk you are to your insurer, your willingness to invest a specific amount means you should be more aware of your risks.  And even if you are not, you’ve effectively saved the insurance company money on any potential claims.  Your insurer is willing to reward you for those potential savings with lower car insurance premiums.

As a general rule of thumb, the lower the deductible on your auto insurance policy, the more you will pay for it.  While we recommend getting multiple quotes to ensure you have the policy that is right for you, this is effectively a way for you to have the lowest rates possible.

That’s right – identical policies with identical coverage amounts with the deductible amount being the only difference – will often result in substantially lower car insurance premiums the higher the deductible amount is.  A policy with a $250 deductible would cost more than one with a $500 deductible.  A policy with a $500 deductible would cost more than one with a $1,000 deductible.

Our advice is simple.  Weigh the effective amount of risk you’re willing to take on, as well as the overall cost and features of your insurance policy.  Always ensure you have the coverage amounts you need, but if you can effectively save hundreds of dollars a year on auto insurance premiums by being willing to risk a higher deductible, you may well come out ahead.

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