What’s a Car Insurance Deductible and How Does It Work?

Finding the best car insurance companies is the first step in buying the auto insurance, but there are many factors you must consider, including the car insurance deductible. Honestly, this is the part of car insurance I spend the most time considering because it determines how much money I must shell out if I cause an accident.

Learn all about car insurance deductibles, how they work, and the role they play in your insurance premium to help you decide.

What is a car insurance deductible?

A car insurance deductible is the amount you pay out of pocket on certain insured losses before your car insurance covers anything. For many auto insurance policies, collision coverage and comprehensive coverage are the two most common types of insurance that include deductibles. However, some policies also include a deductible on other coverage options including:

• Personal injury protection (PIP)
• Uninsured or underinsured motorist coverage

Think of a deductible as a way to share the risk between you, the policyholder, and your insurer. In other words, it gives you skin in the game. If you’re responsible for paying a portion of a claim, you might be less likely to drive carelessly or leave your car unsecured. A deductible helps mitigate these risks for the insurance provider.

There are options to buy an insurance policy with no deductible, or a really low one, but this increases your premiums. I don’t recommend this option, unless you know beyond a reasonable doubt that you can afford the higher premiums.

How do car insurance deductibles work?

Car insurance deductibles tend to be a fixed amount. In general, deductible amounts can range from $0 to several thousand dollars, but the most common deductible I’ve seen is $500.

When you purchase your policy or update an existing policy, you can choose the amount of your deductible for certain coverages. For each coverage that has a deductible, you can set a different deductible amount.

Here’s an example you may choose:

• A $500 deductible for collision insurance
• A $1,000 deductible for comprehensive insurance

This means you’d have to shell out less money if you caused an accident than if you needed coverage for theft or other non-collision types of coverage.

If you have a claim and it’s approved, the amount of your deductible is deducted from the total the insurance company will pay. You don’t have to pay this amount to the insurance company, though.

For example, say you choose a $500 deductible on your collision coverage. One day, you get into a car accident and your insurer determines the resulting damage totals an insured loss of $5,000. Your insurer cuts you a claims check for $4,500 and the remaining $500 worth of damage is your responsibility to pay for.

When do I have to pay the car insurance deductible?

Just because you have a deductible on your insurance policy, it doesn’t mean you’ll pay it every time there is a claim. Here are some common scenarios.

As you can see, the only time you have to pay your deductible is if you are at fault or the person at fault isn’t properly insured.

Sometimes, though, you may file a claim with your insurance even though you aren’t at fault, just for simplicity’s sake. If the other party is being difficult or the insurance company doesn’t respond, you may file a claim with your insurance and pay the deductible, letting your insurance company deal with the chaos.

How does the deductible change my car insurance premium?

As I mentioned earlier, deductibles help mitigate the risk of the insurance provider having to pay out on a claim. The more you’re willing to contribute out of pocket on a covered loss, the less your insurer has to pay.

This means if you choose a higher deductible, then your monthly premium may be lower. If, however, you choose a lower deductible, you’ll have a higher monthly premium.

Keep mind that for each component of your auto policy that includes a deductible, you can choose a different deductible amount. This gives you more control over where you think you need the most coverage and where you might not need as much.

I like this feature because it puts you in control. For example, I like a low deductible for collision so I know I’m protected financially no matter what happens on the road, but I keep the comprehensive deductible a little higher because I don’t live in an area prone to a lot of weather damage or theft.

You can also play with the car insurance types you choose to keep your premiums where you want them, while ensuring you have adequate coverage.

Is a high or low deductible better?

You now know what a deductible is and have a better understanding of how car insurance works, but how do you decide which amount is right for you?

Consider these factors:

• How much do you typically have in your emergency fund? If you have a $1,000 deductible, it means you’re responsible for paying $1,000 of a covered loss. There’s no telling when you might get into an accident, so it’s important to have this amount of money readily available. As long as you have enough in savings to cover your chosen deductible amount, it can be smart to pick a higher deductible in return for a lower premium.
• How much can you afford for a monthly car insurance payment? Generally, the higher your deductible, the lower your monthly auto insurance payment and vice versa. When you’re trying to decide on a deductible amount, consider how much you can afford to pay each month for your policy.
• How likely are you to get in an accident or need the coverage? I know you don’t have a crystal ball, but if you are not on the road much, you’re less likely to get into an accident, so carrying a higher deductible may be a good option because you’ll have lower premiums.
• What is the value of your vehicle? The newer and more expensive your vehicle, the more coverage you might want. After all, you’re probably more inclined to repair a newer vehicle than an older one so a lower deductible might be appropriate. If, however, you’re driving a beater, you may choose to forgo collision or comprehensive coverage entirely, especially if your insurance premium and deductible add up to more than your car is worth.

FAQ

Bottom line

A car insurance deductible is the portion you pay out of pocket when you file a claim for certain losses. Because it’s up to you to decide how much you’re willing to pay toward a claim, it’s important to consider the factors that play a part in determining which deductible amount is right for you.

I suggest you take some time to shop around to find the best policy for you. Try to find a balance between cost and adequate coverage. When it comes to your deductible, choose the amount you're comfortable being responsible for paying in the event of an unexpected accident.

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