A car insurance deductible is the amount of money you tell your insurance company you will cover in the event of a claim.
For example, if you have a deductible of $250 and you have $300 in damage to your car you will pay $250 and the insurance company will pay the remaining $50.
If you have a $250 deductible and you have $2000 in damages, you will still pay the $250, and the insurance company will pay $1750.
If you total your car, your insurance company will write you a check for the car’s value, minus the deductible.
When do I have to pay a deductible?
You have to pay a deductible whenever you file a claim with your insurance company.
If you have an accident and your car requires maintenance, the amount your insurance company will payout will be based on the following formula:
- total cost of repairs
- insurance company payout
For example, if your deductible is $500 and the cost of repairs to your car is $2,000:
- $2000(total cost)
- $1500(insurance payout)
What deductible should I choose?
The deductible you choose will have a major bearing on your insurance premiums, so you should think carefully about which deductible is right for you.
In effect, you’re making a decision based on the risk of having an accident, and weighting short-term savings versus potentially large expenses. The Department of Motor Vehicles recommends that you calculate your deductible based on the following information:
What is your emergency fund like?
The deductible for your car insurance is not like an out of pocket for health insurance, in that you do not meet your maximum level for the year and then are done. You could conceivably have to pay your deductible many times over each year.
Therefore, you should always plan for the worst, and choose a deductible amount you could afford to pay twice in a year without it causing too much of a strain on your finances.
If your emergency savings are less than 3 months’ expenditure, then choose a lower deductible and pay the higher premiums.
What is the value of your car?
If your car is older and unlikely to have a high resale value, then you should think about whether a high deductible is worth it. If your car only has a resale value of $1,500, then it isn’t worth spending $1,000 to get it repaired. In this instance, a lower deductible may be better value.
At the other end of the spectrum, if your car has a high value, then picking a higher deductible will mean you only call on the insurance in the most extreme cases.
What is your driving record?
Although your insurance company will factor this in when they calculate your premium, you should pre-empt them by taking it into consideration when selecting your deductible.
If you have a solid driving history with no accidents or moving violations, then choosing a high deductible will mean your premiums are as low as possible.
What is your risk?
Insurance quotes are effectively a measure of risks – the more likely the insurance company thinks you are to require payment, the higher your monthly premiums will be. Think about this in advance to decide what you will need insurance for.
If you are planning on driving regularly during rush hour, or at night (when most accidents happen), or will be leaving your vehicle parked in a high crime area, then you are increasing your chances of needing insurance money.
In this instance, you can either select a higher deductible to lower your monthly premiums or select a lower deductible in order to avoid large out of pocket expenses.
How does a deductible affect my premium?
Deductibles and premiums are inversely related: as one increases, the other decreases.
This means that there is a ‘sweet spot’ for all drivers where the cheapest combination happens. Naturally, this varies from driver to driver, and from insurance company to insurance company, but it shows that doing research into your options and adding up the numbers is extremely important.
The key caveat is that it is possible to have multiple major incidents in a year that require out of pocket expenses, although that only exacerbates the differences. However, given that this is a driver with no prior history of accidents, his likelihood of having more than one crash for which he is responsible (i.e. he is at fault) is extremely unlikely.
This shows that the cheapest option would be the $100 deductible, which leaves his maximum exposure at $774.
ValuePenguin also ran the same numbers, based on the same driver, but with a more expensive car, a 2010 Mercedes-Benz E350.
As the graph below shows, the impact of the deductible on the annual premiums is much greater. At a $50 deductible, the premium is $1,361 (collision and comprehensive). At $500, the premium is $823. A $2,000 deductible will save $882, or 64% compared with a $50 deductible.
collision vs. comprehensive annual premiums by deductible of a 2010 mercedes-benz e350
- collision premium
- comprehansive premium
Calculating your own risk
Although you will need to do some actuarial math in order to get a true sense of your risk, you can use past performance to indicate future likelihood. For example, if you have not used your insurance for the past three years, assume that you will not for the next three years.
If you had to have insurance cover your costs last year, assume that you will this year. That will give you a rule of thumb to work off.
Using the Camry driver in the information above, if he had been accident-free for three years, he could do the following math, based on the fact that he will need to meet his deductible in four years:
|Deductible ($)||Annual Premium ($)||Four-year premium ($)||Four-year premium plus deductible ($)|
According to these numbers, therefore, the driver’s cheapest option is the $500 deductible, which comes out at $2308 for four years’ coverage and one event that requires him to meet his deductible.
When you are calculating your own insurance premiums and deductibles, make your own table. Use the following template to get a rough idea of the costs involved:
- Deductible ($)–
- Annual Premium ($)–
- N year premium ($)ANNUAL PREMIUM × N
- N year premium plus deductible ($)N YEAR PREMIUM + DEDUCTIBLE
(N is the number of years since you last required insurance to make a payout. Use this as the basis for future incidents)
This will allow you to work out what the cheapest option is for you based on your own personal circumstances, driving history, and make and model of car.
Choosing the right deductible for you is a very precise, very individualized process. Go through the information above and factor in your personal circumstances and the quotes from the insurance companies. In general, however, you should plan for the worst and hope for the best.
Choose an insurance policy and a deductible that covers you in the worst case scenario- you shouldn’t pick a deductible that will leave you unable to cover your expenses. Even though it’s tempting to imagine you’ll never crash, the whole point of getting insurance is for that very eventuality.
Run the numbers based on a best case, worst case, and medium case scenario and you’ll soon see what the best option is.