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Choosing the Right Car Insurance Deductible

Updated on January 4, 2013

Your Auto Policy Deductible

In the world of car insurance, the deductible is simply the amount of money you have to pay out of your own pocket if your vehicle is in an accident or if you need to file a claim. With most auto policies, you as the policy holder are responsible for selecting a deductible that is right for your personal financial situation. The amount you choose can have a very significant impact on the total cost of your policy which translates directly into how much you pay in premiums each month.

If you are like most people, you picked your deductible based on which number didn't sound too big and scary where you got a rate quote from your agent or insurance company. Unfortunately, this can cause you to pay too much for your coverage.

Choosing Your Amount

Believe it or not, there is a better way to pick an appropriate deductible and make sure you are not overpaying for your policy. Let's take a look at an example:

Auto Insurance Buyer A has an excellent driving record and has been accident free for over 5 years. He calls several different car insurance providers and compares rate quotes. He decides on a company and begins to build his policy with them. The agent walks him through the process of selecting the coverage he needs for his car and then asks him to choose his deductible. He is given choices of $200, $250, $300, $500, and $1000. because he doesn't want to have to come out-of-pocket for a lot of money if he has a claim, he decides to go with a $200. His insurer gives him a six month policy for $1085 or $180.83 per month.

Now let's run a comparison with another sample customer.

Auto Insurance Buyer B also has an excellent driving record with no accidents in the last several years. He gets his rate quotes and selects a provider. When his agent gets to the point in the process where he must make a deductible selection, he chooses $500. His agent questions him and reminds him that $500 is a large sum of money. Buyer B sticks to his guns and says, "I'm going to go with $500". His agent enters the information and gives him a six month policy as well. His cost? $576 or $96 per month.

Now as everyone collectively thinks, "Yeah, but he's going to be out $500 if he has an accident!" Buyer B is perfectly content with his decision. Why? By selecting the larger out-of-pocket cost, buyer B is saving $84.83 per month which means he only has to stay accident free for six months to come out on top. As long as he can do that, he will be saving almost $85 every month and will already have the money set aside to cover his deductible if he is involved in an accident!

Use Your Claim History as a Guide

One way to pick the right amount for you is to take a look at how often on average you file an auto insurance claim. If you have never had an accident, it probably doesn't make much sense for you to carry an ultra low deductible on your policy. If this sounds like you, it may be time to call your agent and get a new rate quote with a higher deductible. You could be paying much more per month for your policy than is necessary! Even if your driving record is not perfect, you might be able to realize some savings by adjusting your amount by as little as $100.

Here's how to find out if you could be saving money by making a change:

1. Compare rate quotes from a few different auto insurance companies across a range of at least three deductible levels.

2. Grab a copy of your most recent auto policy and take a look at how much you are currently paying per month. Take note of your current deductible.

3. Look at your claim history. Review your records and count how many claims you have filed over the past five years. Let's say you've filed 2 claims over the course of the last five years. That's an average of 1 claim every 30 months.

4. Run the math. Let's say you are currently paying $155 per month and carrying a $200 deductible. You review your quotes and see that one of the companies you received a quote from will give you a policy for $115 a month with a $300 deductible. Subtract $115 from the $155 you are currently paying ($155 - $115 = $40). The difference is $40 per month. Multiply your potential monthly saving by the average amount of time between insurance claims which in our example is 30 months (30 X $40 = $1100).

Now, evaluate your potential savings. Since you are already carrying a $200 out-of-pocket expense, you would only be increasing your liability on a claim by $100 over what you are currently paying. That means you could save up to $1000 by making the switch as long as you didn't have a dramatic jump in claims over the period.

How much is your car insurance deductible?

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