How Do Car Insurance Deductibles Work?
Posted on Nov 15, 2016
When buying car insurance you’ll hear a lot of unfamiliar words along with some that seem familiar. One of those words, deductible, can be instrumental in determining your auto insurance premiums as well as how much you pay out of your pocket when accidents occur. Choosing the right deductible can help you make your insurance more affordable all around.
What is a Deductible?
The deductible is the amount of money you pay yourself towards repairs when accidents take place. The higher the deductible, the greater your risk is when accidents occur.
Insurance companies reward you for these higher deductibles because they feel you will drive more carefully and defensively if you have a lot of your money on the line in case of an accident. This means that your yearly premiums will be significantly lower with a $1,000 deductible then they will be with a $200 deductible.
How Do Car Insurance Deductibles Work?
If your deductible is $1,000 and you’re in an accident that does $4,400 damage to your car, you will be required to pay the first $1,000 in repairs out of your own pocket. The insurance company will cover the remaining $3,400 (provided, of course, that the actual cash value of the vehicle exceeds $3,400 – otherwise the insurance company will cover what is left of the repair costs, up to the car’s actual cash value).
On the other side of the equation, if you have an accident that does $899 worth of damage to your car and your deductible is $1,000 then you will cover the complete costs of the accident.
Unlike health insurance deductibles which accumulate in value over the course of the coverage period (usually 365 days from the policy’s start date), auto insurance deductibles are generally per incident. This means that every time you’re involved in an accident, your car gets stolen, or other covered events occur, you will need to pay the amount of your deductible. So keep that in mind when choosing auto insurance plans and deductibles.
In accidents where it is determined that you are not at fault and where the other driver’s liability insurance covers the costs of your repairs, your insurance company may not require you to pay the deductible. In some instances, fault takes a long time to discover. You may need to file a claim with your insurance company initially to get the repairs started, but your insurance company can recover damages from the other driver’s insurer if fault is later determined to lie with the other driver. When this happens, your insurance company may reimburse you for the deductible amount you paid.
What is the Right Deductible?
The best deductible amount will vary from driver to driver. There are some drivers that can more easily afford the out of pocket requirements of a higher deductible. Many drivers in this situation feel that the savings on their premiums that having a higher deductible allows makes the insurance policy a worthwhile investment overall.
Many drivers, however, cannot easily absorb $1,000 worth of out of pocket expenses for each accident. It is easier for them to accept higher premiums paid out monthly or quarterly, than to handle the shock of a large deductible in one fell swoop.
Also keep in mind that the actual savings you receive from a higher deductible vary from policy to policy and situation to situation. Work with a trusted insurance agency to determine if the savings you receive from a higher deductible are worth the financial risks. Insurance, after all, is about managing your financial risks.
