There are different factors that go into calculating the cost of auto insurance. These factors include:
- The make, model and age of a car
- The age of a driver
- Driving history
But there is another factor that will dictate the cost of auto insurance premiums: the deductible.
You may be familiar with deductibles in the context of health insurance, and they work the same with auto insurance.
An auto insurance deductible is the amount of money an insured must pay out of pocket each time an auto insurance claim is submitted. If a vehicle suffers damage that costs $ 2,000 and a driver has an insurance policy with a $ 500 deductible, that means the driver will have to pay $ 500 for their insurer to take this note.
One of the reasons auto insurance companies charge deductibles is to encourage safer driving – the rationale being that drivers may be more careful if they know that every time a claim is submitted, it is. accompanied by a price. Deductibles can also, in some cases, deter policyholders from filing a claim, which an insurer wants.
If a driver has a $ 500 deductible and their car suffers damage totaling $ 400, in this situation it would make no sense to submit a claim. This is because they would end up paying more in the form of a deductible than they would for the entire repair.
Typically, when shopping for auto insurance, drivers can choose between a higher deductible and a lower deductible. But what’s the right call?
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The advantage of a lower deductible
If a driver keeps their deductible as low as possible, it means they’ll spend less each time a claim needs to be filed.
Having a lower deductible could save drivers from having to plunder their emergency fund every time there is a problem with their car that has to go through an insurer. When a policy with a reasonable deductible is chosen, a driver’s paycheck is more likely to handle it.
The downside of a lower deductible
Drivers who opt for an auto insurance policy with a lower deductible will spend less each time they file a claim. But they will also pay more in terms of bonuses.
Deductibles and premiums tend to have an inverse relationship: the more you spend on one, the less you’ll spend on the other. So when a driver chooses a policy with a low deductible, they will likely pay more for that policy in recurring premium charges.
What’s the right call?
Anyone who is hesitant about getting a higher or lower deductible should try to calculate their costs under different scenarios.
Let’s say a driver chooses a policy with a $ 500 deductible over a $ 750 deductible. This means that every time they file a claim they will save $ 250.
But how often do drivers expect to file a claim? Ideally, never. But it’s fair to assume that a claim might have to be filed once a year. In this case, drivers must weigh those $ 250 in savings against the cost of higher premiums.
If an insurer will charge an additional $ 25 per month, or $ 300 per year, for a policy with this lower deductible, it may not be worth it. This is because even if a claim is filed, drivers always spend more on higher premiums over the course of a year.
Of course, in this example, drivers get the lowest deductible as soon as two complaints are filed in the year. But again, ideally, this won’t be a necessary thing to do.
Whether it is better to opt for a higher or lower auto insurance deductible, drivers should be sure to research multiple auto insurance quotes before choosing one insurer over another. Comparing offers is a good way to land the most affordable deal.