One of the first decisions to make when transferring, reviewing, or signing a new auto insurance policy is the deductible decision. Most consumers understand that the higher deductible, the lower the monthly payment and the lower the deductible the higher the payment. Therefore, few consumers spend a lot of time considering their auto insurance deductible and will choose the cheapest option available. However, the deductible decision is an important factor in the cost and usefulness of an auto insurance policy.
Auto Insurance Deductibles
By definition, an auto insurance deductible is the amount of money a customer will spend out of their own pocket when they make an insurance claim for an accident. However, there is one important aspect of auto insurance deductibles that most customers do not remember. Many people consider auto insurance deductibles in the same manner they consider health insurance deductibles, but the two are applied completely differently. In auto, the entire deductible is applied to each claim unlike health insurance where the deductible is generally only met once a year.
The deductible you choose could affect much more than your pocketbook. Your deductible choice helps the insurance company to determine the risk that they are assuming, which could impact your future rates. For example, if Bob consistently chooses a high deductible, he obviously doesn’t anticipate filing many claims. If he chooses a low deductible, he is more likely to file a claim, and may consider himself to be a high risk driver. An insurance consumer can save money by choosing a higher deductible that will lower their premium payment. Deductibles offered will vary from insurance company to insurance company but the range is often between $100 and $1000.
Choosing the Right Deductible
When choosing your deductible, consider driving history, past claims, and your financial budget. Your deductible should be low enough to make insurance worth it, but must also fit within your budget. You must be prepared to pay your full deductible in the case of an accident. A higher deductible will make the monthly payments lower, the overall policy cost lower, and may help make drivers a bit more cautious knowing what they have at stake. However, having an auto insurance plan with a high deductible that cannot be paid is of little value in the case of an accident. If you cannot pay the deductible at the time of the accident, the insurance company will most likely not pay their share of the repair costs until you have met the deductible.
Choose the highest deductible you can afford, with the goal to increase your deductible over time as your budget allows. When incurring a higher deductible, it is important to set money aside to cover the cost if and when necessary. Experts recommend using a separate money market account or high yield savings account as a deductible fund, which ensures the money is available and will earn interest in the meantime. Using this method, your deductible can actually earn more money than the interest paid on a traditional savings account. As the money that is saved grows, the deductible can be raised which will lower the premium and allow the consumer to save money.