Car insurance deductibles were introduced so that auto insurance holders won’t file insurance claims for flippant reasons and mess up the system. It places a responsibility on the policyholder, no matter how little, so they only make a claim when needed.
In this post, we’re going to describe how car insurance deductibles work, the types of insurance that require deductibles, how deductibles affect premiums, and other vital areas about deductibles.
What is a car insurance deductible?
A car insurance deductible is a preset dollar amount you’re responsible for paying out of your pocket when filing an insurance claim before your insurance company covers the rest.
Knowing the right deductible to set is critical because it affects the amount of insurance premiums you’ll pay.
How does a car insurance deductible work?
When you get into an accident and you file a car insurance claim, your insurer provides a settlement payout minus the amount you agreed to pay out of pocket before the payout.
That amount you first pay out of pocket before your insurance company settles your claim is called a deductible.
This means that if you file an auto insurance claim for $3500 and your deductible is $500, your insurer will write a check for you for $3000 after you must’ve paid $500 from your pocket as the deductible.
In the same vein, if you get hit and the car repair cost is less than your deductible of $500, you’ll cover the repair cost yourself because the deductible is paid first, and the deductible is sufficient to cover it.
Deductibles range from $100 to over $2000 most times, with the average deductible being $500.
You can choose how high or low you want your deductible to be. This comes with some implications, though.
The higher your deductible, the lower your premium would be. And the lower your deductible, the higher your premium would be.
Some types of insurance coverage require deductibles and some do not.
For those insurance policies that require deductibles, you’ll most likely have a separate and different deductible amount for each of those policies.
Read: How to Get Car Insurance
What types of car insurance include a deductible?
Whenever your car collides with another vehicle or object in an accident, collision coverage covers the repair or replacement of your car, whether you’re at fault or not.
Collision coverage has the highest deductible and premium because it covers the most frequent and expensive accident cases.
Some auto insurance companies offer a starting point for deductibles as low as $0. Others require deductibles from $100 to over $2500.
Remember that if you choose a very low deductible, you’ll pay a higher premium to your insurance company, and vice versa.
Any car accident you get involved in that’s caused by a non-collision event such as fire, storm, vandalism, hail, or other natural disasters is eligible for car repair or replacement using comprehensive coverage.
The deductible in comprehensive coverage is generally lower than that of collision coverage because it’s not as frequent.
Most deductibles in comprehensive coverage start from $100 to $1000.
There are some instances where you won’t require a deductible in comprehensive coverage.
One of them is locating an insurer that offers a zero-deductible comprehensive policy. It exempts you from paying a deductible when you file for comprehensive coverage, but it doesn’t mean that you won’t pay a higher premium for not having a deductible at all, because you would.
Another instance is by filing a full-glass policy, whereby you won’t be required to pay a deductible for any non-collision accident that damages your car’s glass or windshield.
As long as you have an accident that doesn’t involve collision and one that only puts a crack or chip in your glass, you won’t be required to pay a deductible for your comprehensive coverage.
Personal Injury Protection (PIP)
This coverage covers the medical costs and treatment for you and your car passengers in an accident, without regard to if you’re at fault or not.
It also goes a step further to reimburse you for lost wages since you couldn’t go to work because of the accident. Any house chore that you’re temporarily unable to do will be paid for by the PIP coverage.
The deductible for PIP coverage starts from $100 all the way to $2500.
Though Personal Injury Protection is a mandatory auto insurance coverage in some states, other states like Utah doesn’t require motorist to have a deductible when filing a claim for PIP coverage.
Uninsured motorist coverage
An uninsured motorist coverage covers the bodily injury and property damage you incur when you get hit by an uninsured driver.
This coverage type is divided into two – uninsured motorist bodily injury and uninsured motorist property damage.
Uninsured motorist bodily injuries focus on settling the medical costs of your injuries and treatment, while uninsured motorist property damage covers the repair costs of your damaged properties.
Only uninsured motorist property damage coverage comes with a deductible, and it usually swings from $100 to $2000. Uninsured motorist bodily injury damage has no deductible attached to it.
How does the $500 deductible work for car insurance?
A $500 deductible is a mid-level deductible that slightly brings down the premium you’ll pay toward your auto insurance policy.
It works by making you pay the first $500 whenever you file an insurance claim, before your insurer steps in and remits the remaining settlement to you.
What does it mean when you have a $1000 deductible?
A $1000 deductible means that you have a reasonably high deductible that could significantly reduce the premium amount you’ll cough out regularly to your insurance company.
A high deductible like this also means that you’ll pay more, that you’ll pay the sum of $1000 out of pocket before your insurer moves to write a check towards your filed claim.
Is it better to have a $500 deductible or $1000?
A $1000 deductible is only better than a $500 deductible if you can afford to spend a thousand dollars out of your pocket when you’re involved in a car crash. It’s also better if you’ve got a good driving record and you’ve decided to drive extremely carefully, that way you can pay lower premiums without needing to pay a deductible for an accident because car accidents will be very rare and far between.
If you don’t have up to a thousand dollars to spend on an accident before your insurer settles the remaining cost, then it’s best to go with a $500 deductible and pay a higher premium in the process.
Things to consider when choosing a deductible
Here are some factors to bear in mind when choosing a car insurance deductible.
How much can a high deductible reduce a premium?
Every auto insurance company uses different rates in determining the percent of the increase in premiums when deductibles are selected.
The rates could be influenced by state laws or by the car insurance companies themselves.
For most insurance policies, raising your deductible from $100 to $500 could lower the premium by 30%. If you raise the deductible even higher to $1000, you could lower your premium by more than $40%.
Would you save more by having a high deductible and a low premium?
You would save more by having a high deductible and low premium if you’re a really safe driver that can go years without having an accident. It would also help if you live in a low-traffic area where there are fewer opportunities for auto accidents to happen.
On the other hand, if you’re prone to having an accident and filing a car insurance claim regularly, it’s best to have a low deductible and high premium.
Can your savings make room for a high deductible?
Though having a high deductible could help you save more if you drive really carefully, it’s best to make the deductible readily available in your savings.
If the deductible is not available beforehand, things could get messy when you need to file an insurance claim for a car accident. If you can’t produce your deductible, the other party could sue you and you might end up paying more for court settlements.
How deductibles affect premiums
Deductibles determine how high or low your premium could be. A high deductible lowers the amount of premium you pay your insurer, while a low deductible increases your premium to your car insurance company.
It should be noted that the decrease in premium when a deductible gets high is a slight increase, like a 15% to 20% increase.
You would experience a more drastic decrease in premium if you move your premium from $100 to $1000. You could get a decrease of more than 40% on your premium amount that way.
When do I pay my car insurance deductible?
You’ll have to pay a car insurance deductible when your car collides with another car or object (this falls under collision coverage), when your car gets damaged by vandalism, storm, or natural disaster (falls under comprehensive coverage), or when you need to settle the medical costs for you and your car passengers (this falls under Personal Injury Protection).
These car insurance coverages above require a deductible.
Another instance where you have to pay a deductible is when an uninsured driver hits your car. Note that, you’ll only pay a deductible for the repair costs of property damages like fences, walls, mailboxes, or other damaged properties, not bodily injuries or medical costs.
Cases where you aren’t required to pay a deductible
When you get hit by another driver
If another driver is determined to be at fault in a car accident with you, you won’t need to pay a deductible because you would file a claim through their insurance company, not yours.
The only time when there’s a possibility of you paying a deductible is when you file a claim with your auto insurance company.
Sometimes, you might want to repair your car because the insurance companies are determining who is at fault. In this case, you can take out collision coverage from your insurance company and pay the deductible.
However, when the fault is determined to come from the other driver, your insurer will get full reimbursement of that deductible from the insurance company of the at-fault driver by filing a subrogation claim.
Presence of a full-glass option on comprehensive coverage
A full-glass option can be bought under your comprehensive coverage. It allows you to get a full auto settlement whenever your windshield or glass gets damaged without paying a deductible.
The full-glass coverage is optional and not offered in every state.
You sign up for a diminishing deductible
Also called a vanishing deductible, a diminishing deductible is an offer made by car insurance companies to waive $100 off a deductible each year a driver drives safely without getting into an accident.
If you keep on driving year after year without getting into an accident, your deductible will keep getting waived until it drops to $0.
Whenever you get an accident after this time and you need to file an insurance claim, you won’t pay for the deductible.
After that, you can reach out to your insurer on how to qualify for the diminishing deductible again.
Also Read: What Is a Car Liability Insurance?