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How to Get the Most Out of Your Car Insurance Deductible

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How to Get the Most Out of Your Car Insurance Deductible

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Picking your car insurance deductible is a personal financial decision. You know how comfortably you can handle the remaining amount owed during an accident or after a theft. Deductibles often range from $100 to $1,000 and this means once you file a claim, the insurance company will pay the total minus the deductible — you are responsible for this. Can you afford to pay $1,000 if your car is in the shop? This is why you need to understand how your deductible works before making the decision when you review auto insurance quotes.

What is a deductible?

As mentioned, before any insurance claim kicks in to compensate for the loss incurred in an accident or any horrible incident, your insurer will require you to commit a certain amount from your pocket. The amount can be an agreed percentage of the total insurance policy or a dollar amount. This is what is called a deductible.

A deductible, therefore, is the amount you pay out of your pocket for the payment claim to be actionable. Suppose you have a $500 deductible, for example, with an insurance loss of around $5,000. In this case, you will have to pay $500 from your pocket first before your insurance company sends you a check for $4,500 (or up to your coverage limit).

A deductible acts as a shared risk between the shareholder and the car insurance companies. This means if your auto insurance policy does not have a deductible, you can be involved in many accidents at the company’s cost.

How does a deductible affect your annual premiums?

Your car insurance deductible is directly related to your annual premiums, such that paying a higher deductible results in lower auto insurance rates. This is because your insurance company will only cover you with a small percentage. On the other hand, choosing a lower deductible leads to higher monthly premiums. Therefore, you will need to pay higher monthly rates to balance out the increased coverage offered by the company.

The most affordable deductible is $1,000, though some policyholders choose to raise it to $2,000 or reduce them to $500 or even $250. According to InsuraQuotes, increasing deductibles from $500 to $1,000 is likely to cause an average reduction of 10% in annual premiums based on the state. However, this does not mean you must increase your deductibles to enjoy reduced premiums since taking a higher deductible can drastically affect your finances.

Coverage types with deductible options

Before moving ahead to choose your deductible, you need to learn which coverage types are there and if they have deductible options. There are different types of auto insurance policies. While most will compensate the drivers or homeowners after an accident, others will only pay for injuries caused to other people in your car and property damaged during an accident.

Understanding how these policies work will help you choose the best deductible, depending on your location, age, gender, and even credit history. As such, here are the main coverage types with deductible options to choose from.

Collision coverage policy

Collision coverage pays for the damages resulting from a collision with an object such as a pole, guard rail, or a building. It also compensates for damages from potholes or when your car rolls after an accident. Still, it will not pay you for mechanical failure or normal wear and tear. It also applies when you are at-fault accident.

According to Triple-I (Insurance Information Institute), a collision coverage policy costs an average of $300 per year. A deductible will also apply to your policy if you file a claim for damage to your car.

Comprehensive insurance policy

A comprehensive insurance policy covers your car against theft and damages caused by incidents other than collision. Such incidents include, but are not limited to, fire, flood, vandalism, hail, falling rocks, hitting an animal. The cost of car insurance under a comprehensive policy is averagely under $200 per year. You can also sign up for a deductible to minimize the insurance cost offered by the insurers.

In some states, car insurance companies can agree to cater to the costs without paying any deductible. For example, in Florida and South Carolina, insurers repair the damages resulting from a chip or a crack on your windshield with no deductible. Other auto insurance companies also offer zero-deductible comprehensive coverage but with higher premiums. Such zero-deductible insurance policies can give you room to save for an emergency or toward annual premiums.

Personal injury protection

Personal injury protection (PIP) pays for medical bills for you and all passengers in your car after the accident. It can also cover all expenses resulting from lost jobs or even to cover the costs of having someone help you with household tasks if you cannot work. There are various deductible options for a personal injury protection policy. Choosing the best option will help you save on premiums and land a cheaper car insurance policy.

Choosing the best deductible

Again, deciding how much you can pay from your pocket is a personal commitment depending on your financial position. You can take a higher deductible to save on annual premiums or go for a lower deductible to save on out-of-pocket expenses. You can also decide to pay zero deductible on your car insurance policy. However, before settling for any amount, ask yourself the following questions:

Do you have enough savings? Whether you are taking a $250, $500, or a $1,000 deductible, you must first look at your savings kitty. Do you have enough emergency funds to hold you in case of an accident with a higher deductible? Can your savings plan pay for car repair and other party’s damage in case of a fault accident?

If your finances are not that good, it is recommended to go for a lower deductible or even sign up for a zero-deductible insurance policy even if you risk higher annual premiums. Remember, it is equally frustrating not have a car because you cannot raise the required deductible, or you fail to plan for your money when looking for an insurance policy.

What is the cost of your car? The cost and age of your car may also determine how much you will pay for the deductible. For example, an expensive car will cost more on its insurance policy. This means you will pay higher annual premiums, which can only be reduced by taking a high deductible. On the other hand, an older and average car will only cost a few dollars on its insurance policy with lower rates. In this case, a lower deductible will make sense as the car owner can save more on out-of-pocket expenses.

What is your driving history? Drivers with a clean driving record can benefit from a higher deductible since they have low chances of getting involved in fault accidents. On the other hand, drivers with poor driving history should go for a lower deductible to minimize out-pocket payments every time they file a claim. Alternatively, suppose you are a high-risk driver with substantial savings? In that case, you can choose a higher deductible to save on annual premiums.

The bottom line

To keep things affordable, it is recommended to go for an average deductible to balance both your savings and premiums. If you have more than one vehicle, you can also take the same deductible for all cars, even if they have different coverage types. Therefore, knowing what a deductible is and being prepared to pay it during a car repair can help you save a few dollars during a loss. Review multiple car insurance companies for their coverage, deductibles and premiums as they can vary greatly. There are even free comparison tools available such as CarInsurance.net who will do the work for you and show you a number of rates and policies to make the best decision for you.

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Rose Rosie is a writer for the personal finance website, Joy Wallet, which provides readers with useful information, resources, and tools to help maximize their financial fitness.

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