The Ins and Outs of Car Insurance Deductibles

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One of the easiest ways to save money is to adjust insurance deductibles. A deductible, to put it simply, is the money you pay out-of-pocket before your insurance company kicks in and pays its part. When it comes to automobile insurance, or any insurance for that matter, it’s critical that you set smart deductibles for yourself.

Yes, there is some guesswork involved. But armed with the right information, you can set the right deductible that protects you against big losses for a reasonable insurance premium. All to often, people chose a deductible because of the result it has on their monthly premiums: the higher the deductible, the lower the premium. While cost is certainly an important consideration, here’s some additional information to consider before making your decision.

The Basics of Insurance Deductibles

Generally speaking, you’re in control of how much auto insurance you carry. Some minimum amounts of liability are, however, mandated by state law. And if you have borrowed money to purchase your vehicle through a bank or credit union, the lien holder will require that you carry this coverage.

Another basic precept is that auto insurance is a tool to protect you. And everyone has different ideas of how much protection he or she needs — or, risk tolerance. Those who are risk averse are likely to carry a lower deductible. Those with less aversion to risk will typically have higher deductibles. The amount you pay your insurer each month directly correlates to how much risk you are asking them to take on, and how much you are willing to take on yourself.

The more you have to lose, the more protection you’ll need. That’s the operating statement.

Which Types of Auto Coverage Offer Deductibles?

There are many types of auto coverage listed on your insurance policy. The most common type of coverage with a deductible is comprehensive and collision, or physical damage. This is coverage for your vehicle itself, and it pays for damage no matter who is at fault.

Then, there is Personal Injury Protection or PIP — also called “no fault” insurance, and it is only required in certain states: Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania, Utah, or D.C. In an accident, under no fault laws, your auto insurance company will pay for your damages (up to your policy limits), regardless of who was at fault. Other drivers involved will be covered by their auto insurance policies. If you need no fault insurance, you don’t necessarily have to choose a deductible.

It’s best to consult with your insurance agent if you live in one of these states, as selecting no fault coverage can get tricky. For example, you may want to take a deductible if you have health coverage elsewhere since you can only make one claim on any one injury. In addition, some health insurance policies exclude automobile accident, so it may be wise to check with your health care provider to make sure you are covered if you decide to go with a deductible.

The Right Deductible for You

Choosing your deductibles starts with a few questions you might ask yourself:

  • What are the odds that I’ll be in an accident?
  • If I am, what are the damages likely to cost?
  • How much savings do I have that could be used to pay for damages?
  • How much do I need to save in insurance premiums to make taking on this risk worth it?

In short, if you have the money stashed away to pay the deductible in the event of an accident, you might consider going with a higher deductible amount and, therefore, a lower monthly premium.

If you’re not quite comfortable raising your deductibles, but you love the idea of lowering your monthly premium by as much as 40%, here are some suggestions about other ways to save.

Shop Till It Drops

Be sure to go over your coverage with your insurance agent at least twice a year and compare your rates with at least three others. You can also check with your state insurance department who may be able to provide you with a comparison chart for all the major insurers. It’s time well spent, as the competition in this category is fierce and dialing for dollars usually yields tangible savings. And one of the easiest ways to compare insurance costs is with insurance.com. It takes just a few minutes and you get quotes from several well known insurance companies instantly.

Once you’ve found great rates, be sure the insurer is financially stable. Here are two rating companies that can give you the heartbeat of just about any business: A.M. Best and Standard & Poor’s. Consumer magazines can also be tremendously helpful.

Your sate insurance department, as well as friends and family, can also steer you away from companies with too many dissatisfied customers.

Consider Trimming Elsewhere

  • Buying a new car? Check insurance costs before the purchase. Premiums are based on, among other things, sticker price, repair costs, safety record, and theft statistics.
  • Bear in mind that cars with anti-theft devices and safety features (i.e. daytime running lights) equal noteworthy discounts. The Insurance Institute for Highway Safety is a good resource for how each make and model ranks.
  • For older cars, consider dropping collision and/or comprehensive coverage. If your car is worth less than 10 times the premium, it may not be worth this cost. Kelley’s Blue Book is the industry standard for evaluating your vehicle.
  • Bundle your auto and homeowners insurance with the same provider and get a “bulk” discount.
  • Maintain a good credit score. Most insurance companies look at your credit rating when determining your premiums. A bad credit score will mean higher premiums.
  • Drive less. If you drive your car less than 10,000 miles per year, you might be able to qualify for a low-mileage discount with your auto insurer. Ask your agent.
  • Play your membership cards. Some insurers offer discounts for people who belong to certain organizations or professions.
  • Pay all at once. Installment payments are a nice convenience, but they also usually cost more than paying in one lump sum. If your insurer allows you to save by paying up front, take them up on the offer if you can.
  • Don’t let it lapse. Auto and car insurance companies do not like to see lapses in coverage, and they will raise your premiums and possibly disqualify you from discounts if you have any.

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Published or Updated: September 26, 2010
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Ted says:

    I was excited when I changed car insurance companies this year. We got better coverage at a cheaper rate. I was also able to raise our deductible because we know have an emergency fun set up. We always carried a lower deductible because we had no extra cash (in debt!). We also work from home, saving us a few bucks.

    I highly recommend shopping locally first- you never know what a local agent can help you with. He knew our area so well that he was able to re-evaluate how much coverage we had for the house and saved us oodles of money because we were over-insured. Bundled with our car insurance, that saved us around $600 a year just by changing ins companies and being better educated by our local agent.

  2. Donald_B says:

    I recently joined the AARP, and with that switched my home and car insurance to The Hartford, saving more than $350 just for the same coverage plus a multi line discount. Additionally, I’ve hiked up my deductible now that we have a well stocked emergency fund. Your tips are very practical and nicely compiled. Thanks!

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