When choosing the auto insurance policy that’s just right for you, you’ve got a lot of options. Do you want state-minimum liability? Should you pay more for full coverage? Can you take advantage of any special discounts? These are all important questions, but there’s one more to consider: whether raising your deductible will save you money on premiums each month.
Adjusting your policy’s deductible for collision and non-collision claims can indeed impact your premiums in either direction. But is the difference in price really that significant, and is it worth the financial risk?
Let’s take a look at what an adjusted deductible can do to your monthly bill, and whether it’s the right decision for you.
What is a Deductible?
When you purchase an insurance policy of any kind (auto, home/renters, or even health), there is a deductible involved. This is the amount of money that you, as the policyholder, agree to cover upfront if you file a claim.
With an auto policy, the deductible is related to added coverage for your own vehicle. If you’re involved in an accident for which you’re at fault, your state-required liability coverage will cover repairs and damages for the other driver and their vehicle. But what about your car? You still have damage, and you’ll likely want it repaired.
If you’re at fault in an accident--or if your vehicle is involved in a hit-and-run, is broken into, or if the glass is broken/cracked somehow--you can make a claim against your full coverage auto insurance policy. Then, your insurance company will also pay for your vehicle’s repairs, for every dollar past your deductible amount.
What does this mean? Well, let’s say that you get in an auto accident and your vehicle sustains $4,000 in damage. You have opted for full coverage (as opposed to only buying state-minimum liability), and your deductible is $500. This means that you will pay the first $500 in repairs (usually to the repair shop directly). Your insurance company will foot the bill for the remaining $3,500.
Of course, you will pay more money in premiums for collision coverage each month. You’ll also pay more in premiums the lower you set your deductible.
Why Deductibles Impact Premiums
The lower you set your deductible for your collision coverage insurance policy, the higher your monthly premiums will be. Why is this? Well, by lowering your deductible, you’re essentially choosing to accept less risk for your policy. Your insurer shoulders more of the responsibility if you make a claim. So this translates to a higher bill for you each month.
However, if you choose to raise your deductible--essentially accepting more financial responsibility for future claims--your insurance company will reward you by lowering premiums. This is in their best interests, too. Higher deductibles eliminate smaller, more frequent claims against the policy. You won’t make $400 windshield claims if you have a $1,000 deductible, for instance. However, you might if you only have a $250 deductible.
So, you know a higher deductible means a lower monthly auto insurance premium. But how much lower are we talking? Is that drop in price each month really worth the added financial responsibility?
How Much Deductibles Impact Premiums
Unfortunately, there’s no clear-cut answer as to exactly how much your premiums will be impacted if you adjust your deductible up or down. The answer is unique to each company and each individual policy. Depending on your vehicle, driving history, and coverage limits, you may see a greater or lesser impact.
We took a look at two auto insurance companies that both offer quick online quotes to see how a change in deductible would impact the quoted premiums. Here’s a look at how Progressive and Esurance measured up.
When I got my initial quote from Progressive, I picked a Choice (or mid-level) plan. This included property damage and bodily injury liability coverage that was twice my state’s minimum requirement. The default setting was for a deductible of $500 a month. It resulted in a monthly cost of $32.13 (or $386 a year).
Then, I wanted to see how altering my deductible would impact my monthly premiums. Progressive’s online tool was really neat. It lets me see exactly how each change would impact my monthly bill, all from one screen. Here’s what it looked like:
As you see, bumping my deductible from $500 to $1,000 would mean dropping my premiums by $17 every six months. This would result in a savings of $34 a year or about 8% of my premium. This isn’t incredibly significant. But hey, every little bit helps.
If I took it a step further and increased my collision deductible to $2,000, I would see savings of $39 every six months, or $78 a year. This equates to about a 20% drop, or two months of auto insurance coverage at this rate, so that’s quite the savings.
I found similar results from Esurance. There, the website couldn’t confirm that I currently had auto insurance and asked me to fax or email proof of coverage. This raised my monthly premium quote substantially, but the impact of the deductible change was the same.
Esurance even offered up a handy chart, based on drivers like me. There, it showed the true breakdown of the premium and how individual coverage choices--including a raised or lowered deductible--would impact the price I pay.
Here, you can see that the shift from a $500 collision deductible to a $1,000 one results in a savings of almost $12 a month. That’s about $144 a year saved (or just under 7%), which isn’t chump change!
You can also adjust this within your quote directly rather than just calculating by the chart. Here, you see that my premium cost due to the chosen collision deductible of $1,000 is $39.32 a month.
However, if I adjust this even higher to $2,000, my deductible-related price drops to $30.54. That’s a savings of almost $9 a month, or another $108 I could save each year.
Is a Higher Deductible Worth it?
The real question isn’t just how much you could save each month by raising your collision deductibles. You should also be asking yourself, should you?
Yes, you could potentially save tens or even hundreds of dollars a year, depending on your individual policy. However, you need to take into account whether or not you can afford the expenses that come along with a higher deductible.
This means that if a rock cracks your windshield on the highway, you’ll likely replace that out-of-pocket. A few hundred dollars at the glass shop isn’t worth an insurance claim, of course, especially if your deductible is higher than the bill’s total. But do you have the budget to cover that expense when it unexpectedly crops up?
The same goes for your deductible. If you get in an at-fault accident or otherwise need your vehicle repaired, a $250 deductible--even when it’s an unexpected expense--isn’t too painful. However, a $2,000 deductible can be a significant hit to your budget. When $2,000 stands between you getting your vehicle back in driveable shape after an accident or being without a car, can you afford to drop that kind of money without notice?
Making it Work
If you choose to save money each year by holding a policy with a higher deductible, there are a number of ways to make that work for you even more.
Ideally, you should take those savings and put them in your emergency fund. You could even establish a separate, vehicle-specific savings account, specifically for things like glass repair or covering your deductible in the event of an accident. That way, you’ll pay less out of pocket for your policy each month. But you’ll also have contingency funds in place in case something does happen.
You should also research ways to save money on premiums aside from just raising your deductible. These include paperless billing, bundling auto policies with other types of coverage (renters, homeowners, or even personal property, for instance), and being a safe driver. Some states take your credit history into account. So be sure that you’re doing all you can to improve your credit history if you want to see lower premiums.
Switching your auto policy’s collision deductible to a higher amount can be an easy and immediate way to recognize monthly savings. Before you make the shift, though, be sure that you are financially prepared for both out-of-pocket expenses and the risk of paying that higher deductible unexpectedly.
Tuck your savings away in your emergency fund or a designated savings account. Then you’ll not only keep more of your money each month, but you’ll be prepared for anything that happens.