Choosing the right deductible for the collision and comprehensive portions of your car insurance policy is important - after all, it's the amount that comes out of your own pocket before your auto insurer is obligated to pay a dime.
Deductible amounts vary, depending upon state laws and insurance companies' offerings. But in general, you can choose a deductible from zero to $2,500.
A basic rule is that the higher the deductible is, the lower your car insurance premium will be.
Because there are so many choices, deductibles aren't "one size fits all." The variables you should consider include your own current financial situation, your tolerance for risk, whether you owe money on the car and how long you are exposed to the additional risk.
Here are a few tips for making the right choices.
- Choose a deductible amount you can afford. If you crashed your car tomorrow, would you be able to pay $1,000? Your insurance company won't pay until you meet the deductible, and repair shops can charge storage fees if they are waiting on you to save up to pay your deductible so they can release the car.
- Know how much risk you are willing to take. If you couldn't sleep at night because you'd worry about how to pay a $1,000 deductible if you were in an accident, a higher deductible probably isn't for you. On the other hand, if you have some emergency funds saved up and a high tolerance for risk, a higher deductible may be a good choice.
- Understand your lender's requirements. If your car is financed or leased, the maximum deductible amount you can choose is likely already spelled out for you in your car's contract. Most lease and finance agreements will require you to have collision and comprehensive deductibles of $500 or less.
- Consider how the deductible affects the actual cost of the policy. How much will you save now on your auto insurance premiums by choosing a $1,000 deductible over a $500 deductible? Can you save enough in premiums to pay for the added risk?
Your rates for comprehensive and collision depend on three things: the value of the car, the likelihood of a claim and your deductible amount. An expensive car is a bigger risk to an insurance company. So is having a bad driving record or living in a dangerous neighborhood.
A higher deductible takes away some of that risk from the insurer.
I ran quotes for different deductible amounts for a 35-year-old male in Houston with a clean record who drives a 2008 Honda Accord worth about $14,000. The annual premiums with different deductibles were:
- $1,230 with $250 deductible ($714 for liability, $120 for comprehensive, $396 for collision)
- $1,152 with $500 deductible ($714 for liability, $102 for comprehensive, $336 for collision)
- $1,062 with $1,000 deductible ($714 for liability, $84 for comprehensive, $264 for collision)
- $962 with $2,500 deductible ($714 for liability, $62 for comprehensive, $186 for collision)
The amount he pays for liability coverage doesn't change, because that's determined by how much coverage he has bought. In this case, that's $100,000 bodily injury liability per person, $300,000 per accident and $50,000 in property damage liability.
But rates for the physical damages coverages to the Accord change substantially. In this example, the driver changing his deductible from $250 to $500 risks $250, but saves $78. If he goes three years without an accident, he'll be ahead of the game. If he raises his deductible to $2,500, he risks an additional $2,250, but saves $268 a year. He would have to go eight years without an accident to cover the additional risk.
But none of the math matters if he doesn't have enough money in the bank to pay the deductible. (This is what an emergency fund is for.)
As you comparison shop with agents or online, consider several different scenarios to find the best combination of a good car insurance rate and an out-of-pocket amount you can afford.
Tell us how you chose your deductible.