Auto Insurance Deductibles: How Much Should They Be?

When figuring out how much you want to spend on an insurance policy, surely the thought has crossed your mind. “If I choose a higher deductible, my rates will be lower”. Before you go ahead and choose one, take a few things into account including the actual savings, your driving and claims history, and how much you can afford. The following will address a bit of what should be considered before choosing a particular deductible amount.

Your auto insurance policy is a contract between you and your insurance company. The deductible that you choose is your financial obligation to the repairs of your vehicle before your insurance company will contribute to the cost. With that said, it is important that you assess your ability to incur the deductible cost before choosing that particular level. Most deductibles vary between $0 and $2,500 per occurrence with lower or no deductible costing the most and higher deductibles costing less.

A $100 deductible on your collision or comprehensive coverage will cost more than a deductible of $500. The difference in cost can be significant too. If you elect a deductible that will have a smaller impact on your pocketbook if a claim occurs, the insurance company will typically factor that into the policy premiums. Using the deductible amounts above as an example, it can be assumed that a policy holder who elects a lower deductible is more likely to use the coverage at a higher rate. Therefore, the insurance company will charge more for that particular deductible amount. The cost to the policy holder with the lower deductible is $100 per claim rather than $500. Therefore, a policy holder could file 5 claims for the same cost as a single claim with the $500 deductible.

Before deciding on a deductible, think about your past driving history, how many accidents do I typically get into? If you’re a good driver and haven’t had an accident in 2-3 years, the savings may outweigh the benefits between a $500 and a $1,000 or higher deductible. If you’re insuring a vehicle with a $500 deductible on collision and you haven’t had an accident in 3 years, you might want to think about changing to a higher one. If the savings each 6 months was $70 for a $1,000 deducible compared to $500, then over the course of 3 years, you would have saved $420. That might be beneficial if you don’t get into an accident for quite a while. On the other hand if you’ve gotten into an accident every year for the past 4 years, the saving would clearly not outweigh the cost.

Accidents seem to occur at the most inconvenient time, as a result, make sure that you think about the amount you can afford before choosing a particular deductible. The way I look at a deductible is by assessing how much I can afford to pull out of my bank account in order to pay for an accident if it occurs. For myself, I look at $100 as affordable, and $500 as a little less affordable, and $1000 as "ouch that hurts" and $2500 as not even practical. Do I really want to spend $1000 to get my car fixed? Anything above that and I just can’t even imagine how that would feel. How would spending $500, $1,000 or more change my monthly budget?

In the end, I would advise choosing a deductible that you feel financially comfortable with and which possibly saves a bit of cash too. Think about your monthly budget and try to find something that doesn’t make your premium too high while also not impacting your pocketbook too severely if you need to use it.