Why Having a Higher Deductible Lowers Your Insurance Premiums

Car insurance is a non-negotiable expense, and it can be pricey. On average, full coverage car insurance policies cost $1,258 per year according to the National Association of Insurance Commissioners — nearly 6% higher than the average premium from the year before.

If you're researching ways to save on car insurance, raising your deductible is a common tip. Why does having a higher deductible lower your insurance premiums? With a higher deductible, you're taking on a larger share of the financial risk for any claims that pop up, so insurers charge lower rates.

Learning how deductibles work and the pros and cons of a higher deductible can help you choose the right coverage and deductible amount.

What is a deductible in car insurance?

When you purchase car insurance, you have to choose what types of coverage to include, what limits you want, and your deductible.

Your deductible is how much you have to pay for damages or repairs after a claim for a covered loss. For example, if you have a policy with a $500 deductible and you're in an accident and have $1,000 of damages, you would pay for the first $500, and the insurance company would cover the remaining $500.

You only pay the deductible when you have a claim.

What types of coverage have a deductible

When deductibles come into play varies with the type of coverage you have. There are three main kinds of auto insurance.

• Comprehensive: Comprehensive insurance pays for damages to your car that occur due to reasons outside of car accidents. For example, comprehensive insurance would pay for repairs if your car is damaged by a fallen tree. Comprehensive policies are subject to deductibles, and you can usually choose a deductible between $250 and $1,000.
• Collision: If you're in an accident with another vehicle or run into an object like a light post, collision insurance pays for the damages to your own vehicle. Collision insurance has a deductible, and you can usually choose an amount between $250 and $1,000.
• Liability: The only form of car insurance required by law in most states, liability insurance pays for damages or injuries you cause to others in an accident. Unlike comprehensive and collision insurance, liability coverage never has a deductible.

What is a car insurance premium?

Your premium is how much you pay annually, semi-annually, or monthly to keep your policy active — you pay the premium regardless of whether you file any claims or not.

Premiums are based on several factors, including your age, location, the make and model of the vehicle you drive, and your driving record. But, another factor that can significantly affect how much you pay for car insurance is your deductible.

How deductibles can impact your insurance premiums

When you apply for car insurance from an insurance company, you'll go through the insurer's underwriting process. The insurance company reviews your application and determines your eligibility for coverage and evaluates how much risk it takes on by insuring you. Based on that information, it will give you a quote for coverage.

Your deductible is how much financial responsibility you'll have in case of a claim. The higher the deductible, the more of the financial risk you shoulder, so raising your deductible can lower your premiums. By contrast, a lower deductible means the insurer will have to cover more of the cost after a claim, so you'll pay a higher premium.

Depending on your starting deductible and how much of an increase you make, increasing your deductible can reduce your monthly premiums by 15% to 40%, according to the Insurance Information Institute.

For example, here is a breakdown of what your monthly premiums would be with different deductible amounts.

	Monthly Premium	Monthly Savings Compared to $250 Deductible
$250 Deductible	$104.83	N/A
$500 Deductible	$89.11	15%
$1,000 Deductible	$73.38	30%
$1,500 Deductible	$62.90	40%
*Savings are hypothetical and are based on the average cost of car insurance policies combining collision, comprehensive, and liability coverage.

How your deductible comes into play when filing a claim

Whether you're in an accident or your car is damaged in a storm, you'll need to file a claim to use your insurance policy for the repairs. Typically, you'll go through the following process.

1. Report the incident: You have to contact your insurer to notify them of the incident and damage.
2. Assessment: The insurance company will send an adjuster to inspect the vehicle and determine how much it will cost to repair or replace it.
3. Schedule repairs: You can choose any repair shop you wish, so you can schedule your repairs with your body shop or mechanic of choice.
4. Wait for your payout: In some cases, the insurer will pay the repair shop directly. They will pay the shop the covered amount, minus your deductible, and you're responsible for paying the car insurance deductible to the shop yourself. In other situations — for example, if your car is totaled — the insurer will send you the payout directly, minus the deductible amount.

Say you run off the road during a rainstorm and collide with a light post. When your car is evaluated, the adjuster finds that it will cost $2,500 to repair it, and you have a $1,000 deductible. The body shop you choose accepts payments from the insurer, but requires you to cover the deductible upfront, so you'd have to pay $1,000 for the repairs.

Pros and cons of having a high car insurance deductible

Although raising your deductible can significantly reduce your premiums, there are some pros and cons to consider before adjusting your deductible.

Pros

• Cheaper premiums: For those looking for cheaper car insurance, increasing your deductible can reduce your auto insurance premiums by 15% to 40%.
• Lower overall cost: If you don't have a claim, you don't have to pay the deductible. If you're accident and claim-free, a higher deductible can dramatically reduce your overall insurance cost.
• May improve driving: With a higher deductible, you take on more of the financial risk getting behind the wheel. As a result, you may drive more cautiously, reducing the chance of getting into an accident.

Cons

• Higher out-of-pocket costs: If you have to file a claim and you have a higher deductible, you'll have to come up with a larger portion of the repair costs out of your own pocket. Unless you have a substantial emergency fund, coming up with the deductible amount can be stressful.
• Repair delays: If you don't have the cash available to cover the deductible, you may have to delay repairs until you can save up enough money, causing you to lose access to a vehicle.

FAQs

Bottom line

Understanding the relationship between deductibles and premiums can help you choose the right deductible for your financial situation and risk tolerance. With a higher deductible, you take on more of the financial risk of a claim, so insurers will reduce your premiums.

If you don't want to raise your deductible but are looking for other ways to save money on car insurance, you can reduce your premiums by asking about discount programs and shopping around for coverage with the best car insurance companies.