How Do Deductibles Work?

Are you hoping to save money on your car insurance premiums? Opting for a higher deductible is one of the most common tips — but it’s not always the right choice.

Read on to discover how car insurance deductibles work and what you need to know about them.

What Are Deductibles?

Your insurance company doesn’t always cover the full cost of the damages when you file a claim. You often have to pay a portion of the costs. This is known as a deductible — the amount the insurer “deducts” from the payout and expects you to cover.

Should you file a claim, you’ll be expected to pay the deductible before your insurer covers the rest of the cost.

An insurance deductible can be a set amount or a percentage. In the case of car insurance, it’s almost always a set amount — such as $500 or $1,000. Policyholders can change this amount and get a higher or lower deductible.

How Does a Higher Car Insurance Deductible Lower Your Rate?

Opting for a higher deductible means taking more personal responsibility, thereby lowering any insurance payouts you may receive. Taking on more risk means paying a lower car insurance rate.

Drivers who do not need to file any claims can make significant savings by having a higher deductible. Those who do need to file a claim may, however, regret their decision to opt for a higher deductible.

Does Every Type of Auto Coverage Have a Deductible?

Not every type of coverage has a deductible.

Most states compel drivers to carry liability insurance, which covers injury to others and damage to other people’s property. This type of auto coverage doesn’t usually have a deductible. Similarly, personal injury protection (PIP) coverage (which covers your medical expenses and lost wages, as well as your passengers’) doesn’t usually have a deductible.

Collision insurance covers the cost of repairing damage to your car after an accident or replacing your car in the case of a total loss. This type of coverage usually has flexible deductibles. Comprehensive car insurance, which covers the cost of damage caused by theft, vandalism, and acts of nature, also typically has a deductible.

Deductibles can vary from one insurer to the next, so it’s crucial to understand what you’re signing up for before making a decision.

What Is a Vanishing Deductible?

Some insurers offer a vanishing deductible, also known as a disappearing deductible. These programs reward responsible (or lucky) drivers by reducing the deductible each year they don’t file a claim.

What Happens if Your Deductible Is Higher Than the Repair Costs?

Say your car insurance deductible is $1,000, and someone vandalizes your car. The repair costs are only $700 — lower than your deductible. In these cases, you’ll have to cover the repair costs yourself without any insurance payout.

It’s good to note that car insurance deductibles work differently than health insurance deductibles. The deductible typically applies to each individual claim, and it’s not cumulative.

In other words, if a tree falls on your car, causing significant damage that costs more than $1,000 to repair, you will receive an insurance payout. However, you’ll still have to cover the first $1,000 — and the fact that you already paid $700 before doesn’t change that.

How Much Can You Save with a Higher Deductible?

Your deductible makes a huge impact on your coverage rate, especially if you go from a $100 deductible to a deductible of $250, $500, or more. Your monthly rate could be reduced by as much as 25 percent, although that varies from one insurance company to the next.

Should You Increase Your Deductible?

You hope you won’t need to file a claim, but you can’t count on that hope.

Increasing your deductible means taking on more responsibility, so it’s always important that you have the money. Your insurance company won’t pay their share until you cover the deductible.

As long as you keep that in mind, increasing your deductible can be a great way to save on your insurance rate, especially if you’re with an insurer that offers a vanishing deductible.