3 things to know about your auto insurance deductible

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Every driver should have sufficient auto insurance coverage to protect their financial assets. This means choosing the right types of coverage. It also means understanding how franchises work.

Specifically, there are three crucial things motorists need to know about auto insurance deductibles to make fully informed choices about the insurance protection that’s right for them. Here is what they are.

1. You have to pay it before your insurer pays

A deductible is an amount a policyholder must pay after the occurrence of a covered event. The insurer will not begin paying for damage to a vehicle until the deductible has been satisfied.

For example, if a driver has a $500 deductible and the vehicle sustains minor damage that only costs $300 to repair, the insurer will pay nothing. If that same driver with the $500 deductible suffered greater damage and a car needed $1,000 in repairs, the motorist would have to pay the first $500. The insurer would pay the remaining $500 once the deductible is reached.

Since drivers must pay their deductible in the event of an incident that insurance must pay, motorists should ensure that they have the money to cover the amount of their deductible. So ideally a driver with a $500 deductible would have $500 in an auto repair fund or an emergency fund.

2. Higher deductibles mean lower premiums

Since drivers have to pay the deductible when a covered incident occurs, it might make sense to go for the lowest possible deductible. But there is a trade-off to consider. A lower deductible leads to higher insurance premiums, while a higher deductible reduces the cost of coverage.

Drivers should do the math to see if a low deductible is right for them. Let’s say, for example, that an auto insurance policy with a deductible of $250 would cost $1,000 per year and a deductible with a deductible of $500 would cost $850. The driver would save $150 per year or $12.50 per month on premiums, but would have to pay an additional $250 in the event of a covered incident.

If the driver saved the extra $12.50 per month for 20 months in an auto repair account, they might have that extra $250 to put aside and ready to go. Every additional month without an accident would earn them an additional $12.50.

3. The deductible applies to each incident

Finally, drivers should be aware that a deductible applies to each covered incident. This is different from health insurance, where once a deductible has been met for the year, the insurer covers the other costs. This means that if a driver is involved in a collision and suffers $500 of damage covered by their insurance, then is involved in another covered incident and suffers an additional $500 of damage, separate deductibles will apply to each claim.

By understanding these key facts, motorists can make wise choices about how much to deductible on their policy. And they can be prepared to cover the costs of their franchise should something go wrong.

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