Auto Insurance Basics

Auto Insurance Deductibles: How Do They Work?

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The auto insurance deductible is the amount of money you will first be responsible for before the insurance company begins to cover costs. Unlike health insurance, auto insurance policy deductibles are normally on a per claim basis meaning you would have to cover these costs every time you file a claim. Higher deductible policies come with lower annual premiums in exchange for the higher out of pocket expenses. 

Unlike Health Insurance plans where consumers plan covers all types of medical care, car insurance policies are actually broken up into multiple types of coverage. Liability insurance which includes the bodily injury and property damage coverage do not typically have any deductibles attached. Generally deductibles area only applicable to two forms of coverage: 

  • Collision Coverage: Covers damage done to your vehicle when you are in a crash with another vehicle or any stationary object. This covers the cost of repairs and or any replacements necessary for your own care. Collision coverage does not cover the damage you caused to other people's property
  • Comprehensive Coverage: Covers damage done to your vehicle in all instances other than a crash in which you are at fault. This includes things like falling tree limbs, hail or any other types of damage that your car may incur.

How Does The Deductible Work?

Your deductible, typically around $750 will be first applied to any damages. For example if you are in an accident where your collision coverage would apply and the car you were driving suffered damage requiring $3,500 in repairs, you would be responsible for paying $750 of those costs. The remaining $2,750 would then be covered through the collision coverage by your insurer.

In some cases where another driver is at fault for the accident you may wish to file a third party claim against their property damage coverage. Under these circumstances your insurer may pursue a process called subrogation to recoup the amounts they have already paid. In the process they may also help to reclaim any amount that you paid through your deductible.

Choosing the right car insurance deductible amount

Your first consideration when choosing your insurance deductible is how much you would be able to pay in the event of an incident. Insurance companies sell you coverage for a profit, the more risk protection you buy the more they profit and the lower your deductible the more risk protection you are buying. Your deductible should be set at a level where if you had to pay the out of pocket expenses, you could do so reasonably without impacting your financial situation or lifestyle. It is also important to remember that since auto insurance deductibles are on a per-claim basis so the frequency of your claims will be one of the most important factors. If your policy has a $500.00 deductible and you were involved in 4 separate claims of less than $500, then you would be responsible for 100% of all the payments and your insurance would have provided no coverage.

If you have little savings and limited wiggle room in your monthly income and expenses, choosing a policy with a lower deductible and higher premiums can help you reduce your exposure to financial risks in case of an event. One approach you can take is to look at your driving and vehicle history. If your history indicates that you may need to make more frequent claims, you may want to consider selecting a policy with lower out of pocket expenses. On the other hand if you haven't had a history of accidents you may not need a low deductible plan.

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