When you buy car insurance, you expect your policy to help you pay for the damage done to your vehicle in a variety of hazardous events, from wrecks to vehicle fires and more. However, even expansive policies likely won’t cover 100% of your vehicle’s damage costs. Part of these costs might be your responsibility to pay. Usually, these out-of-pocket responsibilities are reflected in your deductible.
Auto insurance deductibles are variable and sometimes a bit complicated to understand. However, they are also flexible, and the savvy policyholder can tailor theirs to their advantage. Let’s take a closer look at the benefits of deductibles, and how you can use yours to save money on your policy.
What is a deductible?
An insurance deductible is almost exactly what it sounds like. It is a certain dollar value that an insurer deducts from your final claim settlement when determining how much to pay you for a claim.
In other words, a deductible is a cost that you have to pay yourself before your insurer will cover the remaining costs of a claim. Say, for example, that you have a $500 deductible on your policy. In this situation, you must pay for the first $500 worth of repairs before your policy will pay at all. Any claims that are less than your deductible value will not have coverage.
When do deductibles apply?
When you start looking for an insurance policy, your agent will likely ask you if you have a preference of what you want your deductible to be. That way, you can choose a deductible that you can afford to pay out of your own pocket.
Different policy components might or might not contain deductibles. Ordinarily, you will find them under your collision and comprehensive auto insurance. These are the portions of your policy that will pay for your vehicle damage. Collision coverage pays for damage sustained in a wreck while comprehensive coverage pays for damage that is not related to a wreck, such as damage from vandalism, severe weather, falling objects or fires.
Since you use collision and comprehensive insurance to pay for your own vehicle damage, then most insurers will require you to share in these costs through a deductible. However, other coverage like your liability policy will not pay you directly, but will compensate others for their losses that are your fault. Deductibles therefore usually don’t apply to these types of claims.
Usually, you will have to choose the same deductibles for both your collision and comprehensive coverage. However, different deductible rules might apply depending on the policy you choose. For example, some insurers cover windshield glass damage under different deductibles and limits than other physical damage. Ask your agent to explain all your deductible obligations when you buy coverage.
How do deductibles work?
Suppose that when you insure your car, you choose a collision deductible worth $1,500. That means that if you have a wreck, then you must pay for the first $1,500 of your repair costs. If you have $5,000 worth of damage, then your insurer will only pay up to $3,500 on your behalf. Again, any damage claims that cost less than the deductible (in this case, $1,500) will have no coverage.
If an accident totals your car, then your deductible will apply after the insurer calculates the cash value of your car. Suppose that your totaled car is worth $6,000 after several years of use. Because of your $1,500 deductible, you will likely only receive a $4,500 settlement for your loss. Please note, even if you have replacement cost coverage, which will pay you a settlement based on your car’s like-new value, a deductible will often still apply.
Can deductibles help me save money on my policy?
When you choose your auto policy deductibles, you directly influence how much your insurer will pay you for a claim. Therefore, the less of a cost burden that you pose to the insurer overall, the less you might pay for your coverage. As a result, increasing your deductibles might help you reduce your premiums.
However, increased deductibles can be double-edged swords if you are not careful. After all, by increasing your deductible, you agree to pay a higher out-of-pocket cost for certain vehicle damage. Therefore, premium savings that you achieve might easily disappear following an expensive accident claim on a high-deductible policy. It is important to choose a deductible value that you are confident you can pay out of pocket for your losses.
An added financial perk that some insurers offer is the vanishing deductible. If you choose this option, your insurer might agree to reduce your chosen deductible by a certain amount for every year that you go without having an accident. So, if you go three years without a wreck, then you might save $300 on your deductible in year three without a significant increase in your premium. Perks like these have their financial benefits, especially if you have a wreck.
Though car insurance deductibles might seem a bit confusing, your independent auto insurance agent can help you understand scenarios when you might have to pay a deductible, and how that may impact your eventual claim settlement. Whether you are looking for a new policy or just want to update your existing plan, we can help you choose the deductible values that are best for you.