Auto Insurance Deductibles Explained

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An auto insurance deductible is the amount of money you are responsible for when filing a claim with your policy.  This amount is then deducted from the auto insurance payout before you are issued a check.

To understand how an auto insurance deductible works, it is helpful to look at a real life situation.  Pretend your vehicle slides off the road and strikes a light pole.  The insurance company’s appraiser determines that it will take $1,500 to repair the damage to your vehicle and you have a $500 deductible.  Therefore, the insurance company will issue a $1,000 check to you or to the shop that will be repairing your vehicle because this is what is left after subtracting your deductible.

The amount of your deductible will have an impact on the cost of your auto insurance premiums.  If you wish to have a low deductible amount, you will pay a higher premium than if you have a high deductible.  Therefore, you should select a deductible that is as high as you feel comfortable paying in order to keep your premiums down.

To determine your personal level of financial comfort, you should consider the following factors:

  • Available Cash.  Do you have enough cash in savings to cover the cost of your deductible should an accident occur?
  • Credit.  If you don’t have enough cash to cover your deductible, do you have enough credit available to you on a credit card to cover the cost if the need arises?
  • The Savings Factor.  You also need to carefully consider how much money you will be saving in your premiums when you increase your deductible amount.  Is the savings worth it?  How long will you need to go without an accident before the savings in your premiums adds up to more than your deductible expense?

After balancing out all of these factors, you can determine if it is worth the risk to increase your deductible and save on the premiums or if you should keep your deductible low.