Choosing a high deductible is a way to save money while fulfilling the legal requirement in many states to have car insurance.
Going from a $500 deductible to a $1,000 one will save 5-10 percent on the premium, or about $15 in monthly savings for the average consumer. Moving three or more cars to a $1,000 deductible could add up to a fair amount of car insurance savings.
The savings could be put away to pay the deductible. Saving about $100 over six months of insurance premium payments can allow some people to pay their bills.
A higher deductible won’t only lead to lower insurance premiums, but to fewer claims filed to keep them low.
There are some things to consider before making such a decision. Here are some of them:
Have $1,000 stashed away?
It would be wise to have the higher deductible amount in a liquidity fund such as a savings account to cover you if you have an accident and have to pay a deductible — which is a specified amount of money an insured person must pay before an insurance company will pay a claim.
Deductible amounts are typically in increments set by each state’s insurance department, often set at $100, $250, $500, and $1,000. The higher the deductible, the lower the insurance premium because the insured is taking on more of the risk.
With a low deductible, you’re paying an insurance company more through a premium to protect you in an emergency, which may not be the best use of your money. You may be better off funding an emergency fund first to cover your living expenses if you lose your job.
If you have a savings account established, start with a $250 deductible. Once you have at least $1,000 in savings, raise the deductible to $500; at a $3,000 balance, raise the deductible to $1,000, she says.
Dropping some car insurance coverage
Some lien holders may not allow a borrower to get a high deductible on their vehicle, such as if they want to drop collision coverage to save money. Collision coverage pays to fix or replace your car if it’s damaged or destroyed in an accident.
A car’s age is a major factor in deciding what type of auto insurance to have and if filing an insurance claim is worthwhile. A car’s value can be looked up on Kelley Blue Book or elsewhere, and generally, car’s drop in value as they age.
An old car may not need full car insurance coverage. If the car is worth less than the deductible, then having a high deductible makes sense and the owner shouldn’t have full coverage.
Collision is one area where increasing the deductible makes sense. Going from $250 to $1,000 can save 20-40 percent on car insurance.
Comprehensive coverage — insurance that pays for damage to your car that aren’t caused by a collision, such as fire and theft — should be kept. However, there isn’t much savings to increasing the deductible for comprehensive coverage, he says.
Liability insurance, which covers damages to another person if you cause an accident, is also worth keeping.
Likely to get into accident?
Another consideration is where you live and what type of driving you do.
For example, living in an area with many trees or deer that could hit your car may be worth having a high deductible for collision and a low one for comprehensive.
People who live or work on a busy street, or commute a lot, have a high chance of getting into an accident and may want a low collision deductible.
When to file a claim
Once you determine the value of your car and get the insurance coverage you need, you’ll know when to file a claim if you get in an accident.
If your car is totaled, you should always file a claim. If it’s damaged and can be repaired, you’ll have to find out if the repair work costs more than the deductible. If the work does cost more than the deductible, then a claim is worthwhile.
Insurance rates won’t increase on your current policy if you file a claim, but they could go up next year at rate renewal time. Not all insurers raise rates based on claims filed for accidents that weren’t your fault, but past accidents are a strong predictor of future accidents.
Good article. Being in the insurance industry, one of the biggest problems seen is that the insured does not have the extra funds to cover the deductible. It is very important that the agent selling the insurance product, stresses the importance of having the deductible already in savings.
In car insurance, I think one that should be taken into consideration is the needs and capability of the buyer. Good article Aaron, and I agree with you with “likely to get into accident” that it is a good basis to determine the cover and type of insurance.