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Deductibles, Coverages, and Car Insurance Rates

Deductibles, Coverages, and Car Insurance Rates

When shopping for car insurance, you have a wide range of options. In general, the more coverage you get, the higher your car insurance rates.

You can go for a low-end plan that costs very little per month and offers little when you make a claim, or you can go for the other extreme, with high monthly premiums and substantial payouts for all kinds of claims.

Before speaking to your car insurance agent and deciding on your policy details, it's best to understand how both car insurance deductibles and coverages affect your car insurance rates.

What Is a Car Insurance Deductible?

Your auto insurance deductible is the amount that you pay out of pocket for damages from a car accident before your insurance company chips in.

Example 1:

You get into a car accident and are found to be at fault, meaning you have to pay the damages.

  • Your estimated repair costs are $1,400.
  • Your deductible is $500.

You would pay $500, and your car insurance company would pay the remaining $900.

Example 2:

You get into an accident.

  • Your damages are $480.
  • Your deductible is $500.

You would pay the entire amount of $480, because it is less than your deductible.

How Car Insurance Deductibles Affect Rates

Rates and deductibles are inversely related; the higher your deductible, the lower your auto insurance rates.

The reason for this is that you are “assuming more risk." That is, you are taking on more risk because if you get into an accident, you will need to pay more out of pocket than if you had chosen a lower deductible.

Since a higher deductible effectively amounts to lower risk and potential costs for the car insurance company, your premiums will be lower.

Selecting a Deductible

You decide the amount of your car insurance deductible. You might be given a choice of certain increments, such as $250, $500, $1,000, and $1,500.

When choosing, you must decide how much risk you're willing to accept or how much you can afford to pay out of pocket if you get into an accident. Remember that your insurance provider will not pay a penny toward your claim until you first pay your deductible amount.

Always consider the following when picking your deductible amount:

  • Your current finances. If you are short on cash, you might be tempted to select a high deductible to save on your monthly premiums, but this strategy can backfire if you do not have enough money in your bank account to cover your deductible should you need it.
    • Example: If you have $749 in the bank, a $1,000 deductible won't make sense because you do not have the money to cover it.
  • Your driving record. If you drive safely and have never had an accident, you might consider lowering your car insurance rates with a higher deductible.

Finally, always ask yourself the following question:

Will the money I save in auto insurance premiums justify taking on higher risk and a higher auto insurance deductible?

Often, the answer is “no," because a policy with a lower car insurance deductible may not be that much more expensive than a policy with a high deductible.

Deciding on Your Coverage

Another major factor in your car insurance rates is the coverages you choose to carry on your policy. You will pay more for higher coverage limits and for carrying optional coverages; however, these optional coverages may offer much-needed protection in case of an accident or other vehicle-related incident.

Liability insurance is typically a legal requirement; however, other coverages such as collision and comprehensive are generally optional.

Reducing coverages can save you money on premiums, but can be financially disastrous if you end up in an expensive predicament.

For example, if you are the victim of severe vandalism or theft, comprehensive coverage can help pay for your costs. Without it, you are responsible for handling them on your own.

The right amount of car insurance is not the same for each individual, and you need to look at your own situation to determine:

  • The coverages you need.
  • The deductibles you can afford.

Manage your risk wisely by being realistic and considering the likely events that can happen. To learn all about the different coverage types, check out our Car Insurance Coverages section.

Once you're ready to buy insurance, make sure you speak to your car insurance agent about the details of their coverage so you know exactly what to purchase for your needs. You can also get an online quote to find the right coverages to fit your needs.

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