Your Auto Insurance Deductible Is Probably Wrong
A woman came into my office last month after a fender bender in a grocery store parking lot. The damage to her bumper was about $1,800. She figured insurance would handle most of it.
Then she looked at her policy. Her deductible was $1,000. That meant she was paying more than half the repair bill out of pocket. She had no idea she had picked that number.
This happens more than you would think. Most people choose their deductible once, when they first buy their policy, and never look at it again. Some pick the lowest option without realizing how much more it costs in premium every month. Others pick the highest deductible to save money on premium and then cannot afford to actually use their insurance when something happens.
So let me break down how deductibles actually work, and how to pick one that makes sense for your situation.
What a Deductible Actually Is
Your deductible is the amount you pay before your insurance kicks in. If your deductible is $500 and you have $3,000 in damage, you pay $500 and your insurer pays $2,500.
Simple enough. But here is where it gets tricky.
You have two separate deductibles on most auto policies. One for collision, which covers damage from hitting another car or object. And one for comprehensive, which covers everything else like theft, hail, a tree falling on your car, or hitting a deer.
These two deductibles can be different amounts. A lot of people do not realize that.
The Math Most People Get Wrong
Here is the trade-off. A lower deductible means a higher monthly premium. A higher deductible means a lower monthly premium. But the savings are not always as dramatic as people expect.
Going from a $500 deductible to a $1,000 deductible might save you $150 to $300 a year on premium, depending on your carrier and driving history. That means it takes about two to four years of premium savings to make up the difference if you have a claim.
If you go three or four years without a claim, the higher deductible saved you money. If you have a claim in the first year, you just paid an extra $500 out of pocket to save $150 on your annual premium. That is not a good deal.
How to Pick the Right Number
Ask yourself one question: If something happened tomorrow and you had to pay your deductible, could you cover it without stress?
If $1,000 would be uncomfortable, do not set your deductible at $1,000 just to save $15 a month on premium. Your insurance is supposed to help you when something goes wrong. If the deductible itself causes a financial problem, you have defeated the purpose.
Most insurance professionals recommend keeping your deductible between $500 and $1,000 for collision, and $100 to $500 for comprehensive. But there is no universal right answer. It depends on your savings, your car's value, and how much risk you are comfortable with.
One More Thing People Miss
If your car is older and not worth much, you might be paying for collision coverage that does not make financial sense. Insurance companies will never pay more than the actual cash value of your car. If your car is worth $4,000 and you have a $1,000 deductible, the most you could ever get from a collision claim is $3,000.
At that point, you might want to drop collision coverage entirely and put that premium savings into your emergency fund instead.
What to Do Right Now
Pull up your auto policy declarations page. Look at your collision and comprehensive deductibles. If you do not remember choosing those numbers, or if you could not comfortably pay them tomorrow, call your agent and talk through your options. It is a five-minute conversation that could save you real money or real stress down the road.
Alexandra Moran is an insurance advisor in Greenville, SC. She writes about home, auto, life, and business insurance to help people make smarter coverage decisions.
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