Auto insurance with a higher deductible might be worth it. Here’s what drivers need to know.
Different factors are taken into account in calculating the cost of car insurance. These factors include:
- The make, model and age of a car
- The age of a driver
- Driving history
But there is another factor that will dictate what auto insurance premiums cost – the deductible.
You may be familiar with deductibles in the context of health insurance, and they work the same with auto insurance.
A auto insurance deductible is the amount of money an insured must pay out of pocket each time an auto insurance claim is submitted. If a vehicle suffers damage that costs $ 2,000 and a driver has an insurance policy with a $ 500 deductible, that means the driver will have to pay $ 500 for their insurer to take this note.
Part of the reason auto insurance companies to charge deductibles is to encourage safer driving – the logic being that drivers can be more careful if they know that every time a claim is submitted it comes with a price. Deductibles can also, in some cases, deter policyholders from filing a claim, which an insurer wants.
If a driver has a $ 500 deductible and their car suffers damage totaling $ 400, in this situation it would make no sense to submit a claim. This is because they would end up paying more in the form of a deductible than they would for the entire repair.
Typically, when shopping for auto insurance, drivers can choose between a higher deductible and a lower deductible. But what’s the right call?
The advantage of a lower deductible
If a driver keeps their deductible as low as possible, it means they’ll spend less each time a claim needs to be filed.
Having a lower deductible could prevent drivers from having to plunder their emergency fund whenever a problem arises with their car which must go through an insurer. When a policy with a reasonable deductible is chosen, a driver’s paycheck is more likely to handle it.
The downside of a lower deductible
Drivers who opt for an auto insurance policy with a lower deductible will spend less each time they file a claim. But they will also pay more in terms of bonuses.
Deductibles and premiums tend to have the opposite relationship: the more you spend on one, the less you’ll spend on the other. So when a driver chooses a policy with a low deductible, they will likely pay more for that policy in recurring premium charges.
What’s the right call?
Anyone who is hesitant about getting a higher or lower deductible should try to calculate their costs under different scenarios.
Let’s say a driver chooses a policy with a $ 500 deductible over a $ 750 deductible. This means that every time they file a claim they will save $ 250.
But how often do drivers expect to file a claim? Ideally, never. But it’s fair to assume that a claim might have to be filed once a year. In this case, drivers must weigh those $ 250 savings against the cost of higher premiums.
If an insurer will charge an additional $ 25 per month, or $ 300 per year, for a policy with this lower deductible, it may not be worth it. This is because even if a claim is filed, drivers always spend more on higher premiums over the course of a year.
Of course, in this example, drivers get the lowest deductible as soon as two complaints are filed in the year. But again, ideally, this won’t be a necessary thing to do.
Whether it is better to opt for a higher or lower auto insurance deductible, drivers should be sure to research multiple auto insurance quote before choosing one insurer over another. Comparing offers is a good way to land the most affordable deal.
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