If you have a car accident or your car is damaged from some other incident, such as a storm, your insurer will pay damages up to your coverage limit, with the exception of the deductible, which is what you have to pay out of pocket before the insurance coverage kicks in.
Reason for deductibles
Though it’s possible to get no-deductible car insurance, the vast majority of policies come with a deductible. Deductibles are a form of cost-sharing, in which you and the insurance company share the financial pain of an accident or other cause of damage to your car. The insurance company mitigates some of its financial risk by making its policyholders pay a deductible.
What’s typical deductible amount?
Car insurance policies typically have deductibles that are anywhere from $250 to $1,000. Usually, the lower your deductible is, the higher your monthly or quarterly premium is. Many people choose to carry a higher deductible to keep their premiums lower, reasoning that they are good drivers who won’t cause an accident, so it will be a financial benefit to them. When you get car insurance quotes, you can change the amount of deductible you are willing to pay to see how it changes your policy cost.
How do deductibles work?
When you make a claim on damage to your vehicle, the insurance company will determine how much it costs to fix your car and then either send payment to the body or repair shop or directly to you. This amount will be minus the deductible you owe. For example, if the total repair bill is $5,000 and you have a $500 deductible, then the insurance company will pay $4,500 and you are responsible for the rest. Keep in mind that the deductible is a per-incident cost. If you have three accidents in a year and your deductible is $500 you will pay $500 each time your car is repaired.
If your total repair bill is less than your deductible, then your insurance company will pay nothing. In this case, it is better to pay the cost totally out of pocket and not make a claim, because a history of claims can cause your insurer to raise rates. This is also the case when the cost of repairs is just slightly higher than your deductible. For instance, if your deductible is $500, and it will cost $650 to fix your car, you might be better off in the long run just paying the whole $650 and not filing a claim.
Though having a higher deductible will mean paying less in premiums, you need to be able to afford the out-of-pocket cost. If paying $1,000 at once would be a hardship, you may want to carry a lower deductible. When getting auto insurance quotes, you can mix and match deductible amounts to see what your premiums will be and what will best fit your situation.