First, let’s start with the basics: a car insurance deductible is the amount of money the policyholder must pony up before their carrier will kick in anything for an auto insurance claim. So, if your car needs $5000 in repairs after a covered event (a crash, vandalism, theft, or weather-related damage), and your deductible is $500, you’ll have to pay $500 and your insurer will cover the remaining $4,500. In most cases, you’ll have to send your deductible to your insurance carrier or pay the mechanic before repairs on your vehicle can begin, so you’ll need to have the cash or credit on hand.
Keep in mind: auto insurance deductibles work differently than other deductibles, like those for health insurance. While your health insurance deductible might be $500 per calendar year, your auto insurance deductible is for each claim—so if you make three claims in a year, you’ll have to pay your deductible each time.
As you might’ve guessed, deductibles are all about risk—we are talking auto insurance, after all. If your policy has a high deductible ($1,000, or even up to $2,500), there is less of a chance you’ll be calling on your car insurance carrier to kick in cash for repairs, and you are therefore less risk to the insurance company, which means you’ll pay less in your premium each month. Inversely, if you choose a lower deductible ($100, say, or even up to $500), you’ll pay more each month in your premium, but in the event you need to file a claim, your responsibility will of course be much less. The answer to which choice is best varies case by case, and can be confusing, but we’ve got the details below to help you figure it out.
How to Choose the Right Deductible Amount
First of all, whichever deductible amount you choose, you’ve got to have the cash to back it up. Don’t choose a $2,500 deductible because it means lower rates and hope you never need to make a claim.
The other thing to consider is this: if you have a high deductible, you will be paying for all of your smaller repairs out of pocket, without involving your insurance carrier at all.
Public service announcement: even if you choose a low deductible, remember to think carefully before you make a claim. If you have a deductible of $250 and you need $300 in repairs, you most likely shouldn’t make a claim (we’d say “Don’t make a claim” but you’re the master of your own destiny). Making too many of what auto insurance companies consider “unnecessary claims” has the potential to not only lead to higher rates for you, it might even result in your carrier opting to not renew your policy when your term is up.
If you find yourself in the financial position of needing to risk it with the highest deductible your carrier offers just to be able to pay your monthly premium, you need a new auto insurance carrier, and The Zebra is here to help.
Sometimes also called a “disappearing deductible” or “deductible rewards,” this option is offered by some auto insurance companies as an option.
From our post about insurance add-ons: A “vanishing deductible reduces your deductible by a certain amount (generally around $50-$100 but you can get up to a total of $500) at the beginning of your policy and then the same amount yearly until it reaches zero. As long as you do not have any accidents and maintain a clean driving record, your deductible will drop.”
Taking advantage of a vanishing deductible option will cost you more per month for your premium. Some companies, like Nationwide, charge a flat rate: $60 per year to be a part of the program. Nationwide, for example, also caps the vanishing deductible at $500 (so it’s only truly vanishing if your deductible isn’t over $500). As for whether a vanishing deductible is a good money saving option, Consumer Reports doesn’t think so. They say, “Eventually the vanishing deductible will cost you more than you’ll save. After nine years, for example, you will have spent $540 for a $500 reduction.”
Major insurance companies that offer vanishing deductibles:
When Will You Have to Pay Your Deductible?
Most states (every state, in fact, besides New Hampshire) require drivers to carry liability insurance. Liability insurance protects only the other driver in the event that a car crash is your fault; it does not cover your car at all. Auto insurance that covers the policyholder is called Comprehensive and Collision, neither of which are required by law (if the car is paid off). Collision insurance will cover the you in the event of a crash that’s your fault, and comprehensive insurance will cover repairs to your vehicle in the event of a non-collision-related event: theft, natural disaster, vandalism, etc.
Your insurance deductible will kick in any time you make a claim, for any covered expense. What’s covered, and when, varies state-to-state and policy-to-policy, so you’ll need to look at the details when comparing carriers. For example, many comprehensive policies will cover windshield repairs, but it’s not a given, so be sure to check.
Do the Math
Bankrate breaks down the numbers with a real-world example: according to their auto insurance expert, the owner of a 2010 Toyota Prius could save between $24 and $30 annually by changing their comprehensive insurance deductible to $500 from $250. With these numbers, it would take years to make up the loss from just one claim.
However, a bigger deductible hike can mean bigger savings: Consumer Reports says that, increasing a deductible from $200 to $1000 can cut a collision premium by 40 percent. According to Wallet Hub, the average monthly price of collision insurance for a $30,000 car with a $100 deductible is $124, but just $72 with a $1000 deductible (that’s a yearly savings of $624, but if you get in an accident, you’ll have to pay $900 more.)
Now, each driver’s individual situation is different. But we caution you to actually examine the savings of a higher deductible. Gather your quotes, and look at one year of premiums for two identical policies: one with a low deductible vs. one with a high deductible. Calculate the savings each month, and then multiply that number by 12 (for one year of monthly payments). How many years of monthly savings would it take to make up the expense from even one claim? Look carefully over your claims history for at least the previous five years (longer if you can)—did you make one claim in five years? Or one claim per year? Your past history is a very good predictor of the future.
Car crashes are somewhat within our control—driving defensively, avoiding distractions, and keeping under the speed limit will all lower your chances of getting in a wreck. But other events, like theft and weather-related damage, are pretty much out of our control. For this reason, it’s best to raise the deductible on collision before raising it on comprehensive.
The Bottom Line
You must be able to pay whichever deductible amount you choose: not in six months, not when you get that raise, or that better job, etc. etc., but immediately; when you sign on the dotted line with your insurer, you need to have the cash on hand to cover your deductible.
Remember that you can (and should) shop for auto insurance at any time, and it actually makes good financial sense to check out your options at least once a year to see if you could save money with a different carrier. Or, you can change your policy with your current carrier at the end of each term, adjusting your deductible to meet your needs.