Looking for a way to reduce your auto insurance premium? If you buy optional collision or comprehensive coverage, which protects your car in situations like accidents or storms, you can save money by increasing the deductible -- the amount you’ll pay out of pocket if you file a claim.
But before you start celebrating your savings, make sure you’re not setting yourself up for financial pain in the long run.
Deductibles lower your auto insurance premiums by letting drivers share some of the risk with insurers. For example, a $500 deductible means that if your car is damaged, you’ll pay the first $500 in repairs while the insurer will pick up the rest -- up to the limits on your coverage. The higher the deductible, the lower your premium.
“Increasing your deductible from $200 to $500 could reduce your collision and comprehensive coverage cost by 15 to 30 percent,” says Loretta Worters, vice president of the Insurance Information Institute. “Going to a $1,000 deductible can save you 40 percent or more.”
Such savings can benefit your budget as long as you have that $500 or $1,000 in the bank if your car is damaged or stolen, says Jack Hungelmann, author of "Insurance for Dummies." If you don’t, you’re taking on too much risk.
“Sometimes people will think, 'I never have accidents, I’m just going to carry a $2,500 deductible.’ And if the loss happens and they only have $700 in the bank, they have to scrape together $2,000 or borrow the money, and that’s going to create a real painful experience for them," Hungelmann says.
The effect of a deductible
Increasing your deductible can have other implications as far as your auto insurance coverage goes.
Insurers don’t offer deductibles for liability coverage -- which is mandatory in 48 states -- but the money you save by raising your deductible on collision or comprehensive coverage can be used to obtain even more liability insurance, Hungelmann says. For example, you can put the $500 you save on your deductible toward boosting your liability coverage from $100,000 to $300,000, Hungelmann says. That increase would be particularly helpful if you're at fault in an accident, as a lawsuit probably would be more financially devastating than the cost of paying a high deductible.
A higher deductible can also work to your advantage if you're in a minor fender-bender. If you select a higher deductible, you won’t file insurance claims for less expensive mishaps that the deductible would cover. Since insurers often will raise your premium when you file a claim, you can avoid filing claims for small things that can lead to higher insurance costs over time, Hungelmann says.
While different companies offer varying deductible amounts, it’s common to find them at the $200, $500 and $1,000 levels, Worters says. The key to picking the right size is ensuring that you can pay it if you need to and that you’re getting enough savings to justify the additional risk.
Weighing the risks
When deciding whether to increase a deductible, Hungelmann suggests that consumers compare the cost of paying the deductible one time with the insurance premium savings they’d amass over five years. In other words, if you’re thinking about raising your deductible from $500 to $1,000, you’ll spend an additional $500 if you have an accident. If you would save $500 or more over five years on your auto insurance by raising that deductible, it would be worth it, he says.
Consumers who've lost their jobs or are otherwise struggling financially might consider increasing the deductible temporarily until their finances improve. “In today’s economy, it’s wise for a consumer to up their deductible to $1,000 or even $2,000,” Worters says.
In fact, since the recession began, more consumers have been choosing larger deductibles, says Robert U’Ren, senior vice president of Quality Planning, a company that helps insurers measure their risk. While a $500 deductible is one of the most common amounts chosen by consumers, “$1,000 is becoming the new threshold,” U’Ren says.
When calculating the right deductible, consider such factors as:
• Whether you have enough savings available to pay the deductible in an emergency.
• Whether you've budgeted enough money for the premium.
• Whether you can afford to buy the amount of liability coverage you want.
• Whether you need collision and comprehensive coverage in the first place. If you calculate your car’s worth at less than 10 times your premium, you might want to drop collision and comprehensive coverage entirely, according to the Insurance Information Institute.
Even if you consider yourself a safe driver, you need to assume the worst-case scenario, U’Ren says. “Ask yourself, ‘If you’re in an accident and the damage exceeds the deductible, what is the amount you would be willing to pay and still feel comfortable with your finances?’”