Fender Bender
The deductibles on your auto insurance policy play an important role in determining your rates. While every insurer is different, and much depends on your driving record, raising them can lower your premiums by as much as 10 percent. It clearly pays to choose them wisely. The problem is, most people give little thought to doing so, and thus burden themselves with higher rates than necessary.
In the space below, we’ll start with an overview that covers how car insurance deductibles work. We’ll then take a closer look at the benefits you’ll enjoy by raising them. You’ll learn which coverages on your policy are likely to have deductibles, and steps to take to make sure your exposure to risk is minimized.
Car Insurance Deductibles Explained
Whenever you submit a claim to your insurer, you are expected to pay the amount of your deductible before your coverage begins. Once you contribute that amount, your insurer will compensate you for the remainder.
For example, suppose you are involved in a minor accident that results in $2,000 of damage to your vehicle. Further suppose your deductible on your collision coverage is $250. In this case, you would be expected to contribute $250 toward repairs, after which your insurance company would cover the remaining $1,750.
Most insurers require their policyholders to pay deductibles on a per-claim basis. For instance, if you are involved in a subsequent accident that results in damage to your car, you’ll need to pay another $250 before your coverage pays for repairs. Review your policy carefully to familiarize yourself with the way in which claims and deductibles are handled by your insurer.
The Advantages Of Raising Your Deductibles
We mentioned earlier that you can save up to 10 percent on your premiums by increasing your deductibles. It’s important to understand the reason.
To your insurer, each policy represents a risk of insurance loss. They calculate your rates based on this risk. They evaluate numerous criteria, such as your driving record, make and model of your vehicle, and where you live. They also consider your deductibles. The higher they are, the more you agree to pay whenever you submit a claim. This lowers your insurer’s risk of loss. It also lowers the likelihood that you’ll submit a claim in the first place. As a result, if you raise them, your insurance company is likely to lower your premiums.
So, how high should you set your deductibles? This depends on your willingness to absorb more financial risk. If you believe you’ll be involved in numerous covered events (e.g. collisions, vandalism, theft, etc.), a lower amount, such as $250, may be suitable. (Keep in mind, however, your rates will rise with each subsequent claim.) If, on the other hand, you feel such events are likely to be rare, keep them high (for example, $1,000). You’ll save substantial money over the long run.
Which Coverages Have Deductibles?
Most optional coverages require deductibles. Collision and comprehensive are the most common endorsements, but deductibles may also be applied to Family Protection and damage to non-owned vehicles (e.g. rental cars). Additionally, all perils coverage is usually accompanied by a deductible; it is often the same as those carried on your collision and comprehensive coverages.
Mandatory coverages, such as third-party liability and direct compensation can also have deductibles. This depends largely on where you live.
How To Address Your Increased Financial Exposure
Suppose you have set your deductibles at $1,000. When you make a claim, you’ll be expected to pay this amount before your insurer will cover the rest. Note the sequence of events: you pay, then your insurer pays. If you lack the funds to meet your deductible at the time you make a claim, your coverage may not start.
This is the reason it is important to set aside funds to pay your deductible. Place the amount into a savings account. That way, it will be available and easily accessible if the need arises.
When you contact your insurer to raise your deductibles, take the time to request quotes from other insurance companies. You may find that another insurer can offer lower rates for the same coverages.
