Auto Insurance Deductible
In order to determine exactly how much car insurance you can afford, you need to understand what a deductible is and how it works. When buying car insurance, you must consider both the premium and your deductible when determining your budget for coverage.
Continue reading to learn all about auto insurance deductibles and how they affect the cost of your car insurance policy.
What Is a Car Insurance Deductible?
A deductible is the amount of money that you are required to pay out of pocket before your expenses are paid on a claim.
If you are in an accident and you have:
- $3,000 of damage to your vehicle.
- $500 deductible.
You will pay $500. Your car insurance company will pay the remaining $2,500.
When you have an accident, your car insurance company will pay for damages up to the limit of your policy. Regardless of how serious how the accident is, you will only need to pay your auto deductible.
NOTE: Keep in mind deductibles do not apply to liability auto insurance coverage, as that pays for damages incurred by another driver when you cause an accident. Rather, it would apply to coverage types that pay your damages, such as collision or comprehensive coverage.
Your deductible will vary according to:
- The terms of your policy.
- Your premium.
You can occasionally find policies with no deductible, but the auto insurance premiums are significantly higher for this type of coverage. In general, the higher your deductible, the lower your premium.
Subrogation and Your Car Insurance Deductible
If you are involved in an accident with another driver and fault is not immediately clear, you may be advised to file a claim with your own auto insurance company in order to get your expenses paid sooner.
If, after the accident investigation, it's determined that the other driver caused the accident, your insurer will generally try to get back the money they paid on your claim. This is called subrogation.
Essentially, during subrogation, your insurer seeks reimbursement of expenses they paid on your behalf from the insurer of the at-fault driver.
Once you've paid your deductible and your insurer has covered your expenses (up to your policy's limit), your car insurance company may decide to pursue subrogation.
If your car insurance company successfully recovers the money paid for your claim, they may reimburse you for your deductible.
Choosing Your Deductible: Low vs. High
If you're on a tight budget, you may consider lowering your auto insurance payment by increasing your deductible. However, this is one cost-cutting measure that may not always be in your best interests.
It's true that a higher deductible will result in slightly lower monthly car insurance premiums; however, you need to realistically assess how much you'll be able to pay if you do get into an accident. Remember, car accidents can happen at any time, so you must determine whether your current budget would allow for payment of a very high deductible.
If you don't have easy access to these funds in your emergency savings, you may have to resort to measures such as a high interest personal loan or a cash advance on your credit card. In all likelihood, both options would cost you more than you'd save on your premium.
It is better to obtain several different car insurance quotes to make sure you're getting an affordable auto insurance policy.