Insurance

3 Things to Know About Your Car Insurance Deductible

Two people exchanging information with their phones while standing over their cars after a fender bender.

Image source: Getty Images

Motorists need to know this information to make the right coverage choices.


Key points

  • Drivers need to make sure they have the right auto insurance coverage.
  • Auto insurance policies come with deductibles.
  • Motorists need to know how their deductible works and make informed choices about it.

Every driver needs to have sufficient car insurance coverage in place to protect their financial assets. This means selecting the right types of coverage. It also means understanding how deductibles work.

Specifically, there are three crucial things motorists need to know about car insurance deductibles to make fully informed choices about what insurance protection is right for them. Here’s what they are.

1. You have to pay it before your insurer pays

A deductible is an amount that a policyholder must pay out after a covered event occurs. The insurer will not begin paying for any damages to a vehicle until after the deductible has been met.

For example, if a driver has a $500 deductible and minor damage occurs to the vehicle that costs just $300 to repair, the insurer would pay nothing. If that same driver with the $500 deductible incurred more major damage and a car required $1,000 in repairs, then the motorist would need to pay the first $500. The insurer would pay the remaining $500 after the deductible was met.

Because drivers must pay out their deductible when an incident occurs that insurance should pay for, motorists should make certain they have the money available to cover whatever amount their deductible is. So, ideally, a driver with a $500 deductible would have $500 in a car repair fund or an emergency fund.

2. Higher deductibles mean lower premiums

Since drivers have to pay for the deductible when a covered incident occurs, it may seem smart to opt for the lowest possible deductible. But there is a tradeoff to consider. A lower deductible results in higher insurance premiums, while a higher deductible lowers the cost of coverage.

Motorists should do the math to find out if a low deductible makes sense for them. Say, for example, an auto insurance policy with a $250 deductible would cost $1,000 per year and a deductible with a $500 deductible would cost $850. The driver would save $150 per year or $12.50 per month on premiums but would have to pay out $250 more in the event of a covered incident.

If the driver saved the extra $12.50 per month for 20 months in a car repair account, they could have that extra $250 they’d have to pay set aside and ready to go. Any additional months they went without an accident would leave them $12.50 better off.

3. Deductible applies to each incident

Finally, drivers need to know that a deductible applies to each covered incident. This is different from health insurance, where once a deductible has been met for the year, the insurer covers other costs. This means if a driver is involved in a collision and incurs $500 in damages their insurance covers, and then is involved in another covered incident and incurs another $500 in damage, separate deductibles would apply to each claim.

By understanding these key facts, motorists can make smart choices about how large their deductible should be on their policy. And they can be prepared to cover the costs of their deductible should something go wrong.


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