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

If you’re currently shopping to get car insurance, you may be wondering what a car insurance deductible is and how it works.

Deductibles are common to most insurance policies — that includes health insurance, home insurance, and car insurance. But understanding the role that deductibles play in your car insurance policy is an important step in making sure you have the coverage you need at the cost you can afford.

Let’s first take a look at what a car insurance deductible is, and then we’ll explore how it plays into the cost of your car insurance policy.

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 kicks in. For many auto insurance policies, collision coverage and comprehensive coverage are the two most common items that include deductibles. However, you may also find a deductible on other components of your coverage, such as personal injury protection (PIP) and uninsured or underinsured motorist coverage.

A deductible is 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.

Although you can choose an insurance policy that has no deductible or a lower deductible, you’ll pay a higher premium for that as a result. This is because you’re relying on your insurer to provide more coverage so you can reduce any unexpected out-of-pocket expenses. Similarly, you can reduce your monthly premiums by paying a higher deductible and assuming more of the risk.

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 is $500.

When you purchase your policy or update an existing policy, you can choose the amount of your deductible for certain coverages. As mentioned earlier, this most often applies to collision and comprehensive but can include other coverages such as liability insurance as well. For each coverage that has a deductible, you can set a different deductible amount. So you may choose a $500 deductible for collision insurance and a $1,000 deductible for comprehensive insurance. This allows you to tailor your car insurance policy to your needs, driving habits, and budget.

When you submit a claim and it’s approved, this dollar amount is deducted from the payout you receive. You won’t ever have to make a payment to your insurer in the amount of your deductible.

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.

Car insurance deductibles are applied each time you file an insurance claim. So, if you file a claim for damage this month and next month, you will be responsible for paying up to your deductible amount each time.

Do you have to pay the deductible if you are not at fault?

It’s possible to have a deductible listed on your policy but not actually have to pay it. Here are a few scenarios in which a deductible won’t apply to you:

• An insured driver hits you. If you’re involved in a car accident and the other driver is deemed at fault, their auto insurance provider might pay for your repairs, in which case you would not have to pay your deductible. Alternatively, you may choose to file a claim with your insurance, pay your deductible, and your insurer can seek reimbursement from the other driver’s insurance. Although this means you’d have to pay your deductible, it can sometimes be a quicker process for getting you and your car back on the road.
• You chose not to have a deductible. In some states, and depending on your policy, you can choose to select a $0 deductible on your policy’s collision and comprehensive coverage. This means you wouldn’t be required to pay any amount upfront toward a covered claim. For example, say you opted for comprehensive coverage with a $0 deductible. In the event you have a covered claim for $2,000 in repairs, your insurance would reimburse you the entire $2,000. Although you won’t have to pay out of pocket for these repairs, the amount of money you pay for your policy each month will likely be significantly higher.

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. As a result, if you choose a higher deductible, then your monthly premium will typically be lower. If, however, you choose to bear less of the cost of a claim by choosing a lower deductible, the higher your monthly premium will be.

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. Although this can be confusing, it also gives you the ability to have a lot of control over your insurance coverage and your potential out-of-pocket expenses.

For example, if your car is typically parked in a secure, covered garage, you’re probably less likely to file a comprehensive claim for damages from things such as theft, vandalism, and flooding. You may then opt for a higher deductible because the chance of you needing that type of car insurance is low. In this scenario, choosing a higher deductible makes sense and will lower your car insurance premium.

Should you choose a high or low deductible?

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? There are several factors to consider when choosing your deductible amount. I’ll walk you through them to help you come to a decision.

• 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? If you are not on the road much, you’re less likely to get into an accident. In this way, it might make sense to have a higher deductible because you’re less likely to have to pay it.
• What is the value of your vehicle? The value of your vehicle is an important factor in what deductible amounts make sense. 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. In this case, a lower deductible might be appropriate because you want your insurer to provide more coverage. You’ll pay a higher premium, but that’s because your insurer is picking up more of the risk. If, however, you’re driving a beater and are building your savings to eventually replace it, you may choose to forgo collision or comprehensive coverage entirely. This is also an option if your insurance premium and deductible add up to more than your car is worth. For example, if you have a $1,000 collision deductible on a car that’s worth $1,000, you’re paying for insurance that might not pay out when you need it. If you’re in an accident and the cost to repair your vehicle exceeds the value of your vehicle, your insurer will likely consider it a total loss. With a total loss, an insurer will generally pay the cash value of the car, minus your deductible. In this case, you wouldn’t receive anything. In short, if it makes sense not to have these coverages, it will help you save money on car insurance.

Bottom line on how car insurance deductibles work

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.

These factors to consider include things like:

• How much you have in savings to cover the cost of your deductible
• How much you can afford to pay each month in premiums
• The value of your car
• How often you’re on the road

As always, take some time to shop around to find the best car insurance 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.