Personal auto policies can be frustrating when it comes to selecting what liability limits to carry, whether to purchase uninsured motorist coverage, deciding about towing and rental, and which deductible should I choose for my comprehensive coverage and collision coverage. Oh, and by the way, should both deductibles be the same or should one be lower than the other?
It’s great that so many coverages are packaged in a personal auto policy but at the same time, it can be frustrating to know which coverages you should select or decline. In this article, we’ll attempt to help you decide what auto insurance deductible you should choose and why.
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What is an Auto Insurance Deductible?
Certainly, most car owners know what an insurance deductible is but knowing why auto insurance companies offer one may not be so clear.
Insurance companies offer deductibles to encourage car owners to take part (self-insure) in protecting their vehicles. Deductibles offer two positive outcomes, one for the policyholder and another for the insurance company.
- By having a deductible on your physical damage coverage (comp and collision), you have the ability to reduce your cost of insurance because you have reduced the risk to the insurance company.
- The insurance company will save money on how much they pay for claims and the frequency in which claims are filed because policyholders will not file a claim if the repair is going to be near or less than the deductible.
Just in case you were wondering, there are companies that offer zero deductible physical damage coverage but they price it very high so car owners will not be tempted to ask for it.
Which Auto Insurance Coverages require a Deductible Selection?
Not all coverages in a personal auto policy have a deductible option. For example, liability insurance typically pays from dollar one since it covers the injuries or property damage to a third party.
If you live in a “no-fault state” or a “choice no-fault state” you will likely be required to carry personal injury protection (PIP) which does allow for the policyholder to select a deductible.
PIP coverage is similar to health insurance except it will typically cover lost wages as well. It is designed to cover a driver’s injuries after an accident no matter who is at fault – hence the term “no-fault.” Since many drivers have individual or employer-sponsored health insurance that will also pay for medical expenses resulting from an accident, many people will choose the maximum deductible allowed to reduce the PIP premium in their auto policy.
If your state allows uninsured motorist property damage coverage, you can choose a deductible for that coverage as well.
The primary coverages where deductibles are considered are comprehensive insurance and collision insurance. These are the two coverages that protect your vehicle. Most insurers require that you select a deductible from the list offered with the policy but there are some companies that do not require any deductible. For most insurers, the deductibles allowed are typically $250, $500, $1,000, and $2,000.
Additionally, you can choose a different deductible for comprehensive and collision which makes sense when you consider windshield claims.
How do Deductibles work exactly?
This is the easy part. If your car is damaged, totaled, or stolen, your insurance company is going to pay the cost to repair or replace your vehicle minus the amount of your deductible. For example, let’s say the hood of your car is vandalized and needs to be repaired and the estimate is $1600 for paint and dent removal. You would pay your deductible amount and the insurance company would pay the balance of the repair bill. Keep in mind, however, you don’t get to take your car home until the repair bill has been completely satisfied.
Which Auto Insurance Deductible should I Choose?
The amount of your deductible should be based on your appetite for risk. In other words, since you will likely have to pay your insurance deductible at some point (it could easily be more than once), it makes good financial sense to select a deductible that you comfortably pay out-of-pocket.
Many car insurance shoppers are tempted to choose a very high deductible to lower their monthly premium but this could easily end up with you driving a damaged vehicle or worse yet, your car has to be left at the repair shop until you can pay your portion of the repair bill.
It’s interesting how a lot of drivers choose a high deductible and then when a claim happens, they have to pay their share with a high-interest credit card.
In any case, the insurance policy you purchase should be something you can comfortably afford so your choices may come down to what you can afford and not what is the best value.
When you Don’t Have a Choice
If your car is financed or leased, the lender and the lease company can and usually do put a cap on the deductibles they will accept. The reason is that the lender or lease company wants their collateral properly protected and if they discover it isn’t (according to the terms of your contract) they will repossess the car in a heartbeat.
If you are still undecided or not sure which deductible will work best for you, speak with an insurance agent and ask questions the questions that will help you make an informed decision about your car insurance deductibles.