6 Smart Ways to Choose the Right Auto Insurance Deductible
You may already know that in order to pay less each month in auto insurance, you can raise your deductible. Liability insurance doesn’t have a deductible so you’re looking at the cost of a deductible for uninsured motorist coverage, collision insurance and/or comprehensive coverage. Some insurance carriers have deductibles as high as $2,500! But do you know what that means if you have a car accident? It means that you’ll have to pay for $2,500 worth of damage before your car insurance company will begin to cover one cent. This is all fine, unless you do not have $2,500 on hand or total damages cost $2,600 (you’d pay $2,500 and your insurer would pay $100 -- painful.). The lower the deductible, however, you’re paying more monthly -- and a lot more if you have an imperfect driving record. Zero deductibles barely exist these days, and you’ll be hard pressed to find a deductible less than $250 with any insurer.
Let’s look at what you should consider when choosing a car insurance deductible.
1. What Does Your Insurance Agent Have to Say About Your Auto Insurance Deductible?
If you have a good relationship with your insurance agent, (s)he will suggest that you choose one deductible amount over another. Often, it’s because (s)he has a pretty good picture of your financial situation. However, if you do not have that type of relationship with your agent, you may want to consider finding an agent you can trust. That’s what his/her primary job is to do -- make your life easier. Of course, you should not just let an agent decide on a deductible amount by him or herself. However, (s)he should know what works best for you based on the information you share with him/her. Make sure to be honest, and in the end, make the decision that feels right for you.
2. Do You Have an Emergency Fund?
If you’re like the average American, you live paycheck to paycheck and have little or no savings. What does your bank account look like all month long, not just on payday? If you choose something like $1,000 deductible or higher, do you have that kind of cash to pay upfront? If you don’t have an emergency fund, you may want to start one and take that amount into consideration when choosing your deductible.
Keep in mind that you can change your deductible amount at any time. If you’re not sure what it is or if you chose an amount that you know you won’t be able to pay today (or even next month if you plan to start saving for your emergency fund today), you may want to lower that amount and instead pay a few more dollars in premiums each month. Also take into consideration other expenses go hand-in-hand with accidents so make sure you have rental car coverage or else you’ll be paying for that out-of-pocket too while you’re car’s in the shop getting fixed.
3. How High Is Your Risk?
Do you drive during typical commute hours? Do you take especially busy roads or dangerous intersections? Have you had lots of fender benders or do you back up into objects often? Are there often accidents in the areas you pass on your way to work? Are there many accidents involving wildlife where you live (do you often see deer)? Do you live in a high-crime area or has your car ever been broken into? You may want to choose a lower deductible if your chances of having an accident or a loss are high. Keep in mind, however, that your monthly bill will be considerably higher if you are already in a high-risk category for drivers. You’ll need to calculate car insurance with both deductibles to see which is more beneficial to you in the long-run (scroll down for more on this.).
4. What’s Your Car Worth?
This is an important question to ask when trying to establish the right car insurance deductible. The more expensive your car, the more it will cost to insure and fix. Older cars are also pricey to fix sometimes because parts are harder to find. Most people with an expensive car carry higher deductibles ($1,000 or more) because the savings in monthly premiums is significant. However, this only makes sense to do if you are able to pay that amount after an accident, including a minor fender bender, which will likely end up coming out of your pocket 100% (if it cost $500, insurance won’t pay a pretty penny because you’re responsible up to $1,000).
As for older cars, it may not make sense to carry a high deductible if you have comprehensive or collision coverage because the deductible amount may fall within the range of the car’s value. In fact, it may not make much sense at all to continue carrying physical damage coverage on a very old car (if your car is worth $2,000 and you’re paying monthly for physical damage coverage and have to pay a $1,000 deductible for coverage to kick in, you’re throwing money away!).
It’s always best to do the calculations with a trusted agent before you elect coverage and deductibles. Doing so with your insurance agent is highly advised. If yours is not very receptive or helpful, let us pair you up with a professional who cares about their clients by visiting here.
5. What’s the Savings with a High Deductible?
It’s a good idea to calculate different deductible amounts, like $500 for collision and then $1,000 for collision and so on. See how much you save in premiums with the higher deductible and and how long it will take for the savings to add up to the difference between deductibles ($500 in this example). If you save hundreds of dollars in the next 2 to 4 years keeping your deductible high, you may want to choose that higher deductible and add your premium savings to your emergency fund. You never know when you’re going to be in a car accident but it’s important to prepare for one financially, just in case.
Sometimes, an insurer will cut a check even if you don’t pay the deductible. They will deduct the deductible amount from the amount they sent you. So let’s say the damages to your car were $3,000 and you have a $2,500 deductible, the insurer would cut you a check for $500, which will do you no good unless you’re good for the $2,500 or can put it on a credit card, not an advisable action to take because of the interest rates on most credit cards. Unless you have a zero APR card, you’re paying more than $2,500 for the repairs, possibly hundreds more if your APR is really high and you let the balance linger.
6. What Is a Vanishing Deductible?
No, it doesn’t mean that your deductible vanishes and your insurance company pays for 100% of the damages. A vanishing deductible is an optional feature designed to save you money on your car insurance deductible if you don’t file any claims over a certain period time. It’s a reward for safe driving and not getting into accidents. Not every auto insurance company offers this option but many do. This feature is not free, however, and the rate for this add-on insurance varies from one carrier to another. Unless you have a perfect or near-perfect driving record, the vanishing deductible doesn’t make much sense to have. With that said, the goal is to work up to a $0 deductible. Once you get there, if you’re in an accident, your deductible will go back up to $500 at minimum plus the cost of the vanishing deductible coverage, so you’d be paying more than you would if you didn’t have it.
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