Accepting a higher deductible on your insurance policy is one of the most effective ways to reduce your premium costs. But what exactly is a deductible, and how much can you save by raising it? This article will explain everything you need to know about insurance deductibles, including how they work, what factors determine the amount, and whether choosing a higher deductible is the right strategy for you.
What is an Insurance Deductible?
A deductible is the amount you must pay out-of-pocket before your insurance coverage kicks in. For example, if you have a $500 deductible on your auto policy, you must pay the first $500 of any claim before your insurance starts contributing.
Deductibles apply to many different types of insurance, including:
- Auto insurance
- Homeowners insurance
- Renters insurance
- Health insurance
With auto and homeowners/renters insurance, the deductible typically applies separately to comprehensive and collision coverage. For health plans, the deductible must be met before the insurer starts sharing costs for covered medical care and prescription drugs.
Insurance deductibles serve several important purposes:
- They help keep premiums affordable by limiting the insurer’s financial exposure.
- They incentivize policyholders to use insurance judiciously for large claims rather than small expenses.
- They give policyholders a way to reduce premiums by accepting more upfront risk.
How Deductibles Affect Premium Costs
In general, a policy with a higher deductible will have a lower premium than the same policy with a lower deductible. That’s because you are responsible for more out-of-pocket costs before the insurance kicks in.
Here’s an example of how deductibles impact premiums for auto insurance:
As you can see, raising the deductible by $250 saves $100 on the annual premium. That’s a savings of about 8-13% just by accepting a slightly higher out-of-pocket cost.
The savings are even more substantial with a $1,000 deductible – an annual savings of $300, or 25% off the base premium.
Percentage savings from higher deductibles may vary by insurance company and policy type, but the general principle remains the same: Higher deductibles equal lower premiums.
How Much Should Your Deductible Be?
Choosing the right deductible amount involves balancing premium savings against your ability to pay the deductible if needed. Here are some factors to consider:
Your budget – Can you afford to pay the deductible amount in the event of a major claim? If not, a lower deductible may be the safer choice.
Your risk tolerance – Are you comfortable accepting more upfront risk in exchange for lower premiums over time? Higher risk tolerance favors a higher deductible.
Your driving record – Safe drivers are less likely to need to pay the deductible, so can elect a higher amount to maximize savings.
Your claim history – If you’ve filed multiple claims in the past, it may be smarter to keep the deductible lower to avoid large out-of-pocket costs.
Your car’s value – If your car is worth less than 10 times the deductible, you may drop collision coverage entirely rather than pay a high deductible.
Your financial situation – Make sure you have enough savings set aside to pay the deductible in the event of a major accident or loss.
Here are some general guidelines on recommended deductible amounts based on your situation:
- Excellent credit, clean driving record: $1,000+ deductible
- Good credit, few tickets/accidents: $500-$750 deductible
- Poor credit or new driver: $250-$500 deductible
- Older car, tight budget: Drop collision coverage or keep a $250/$500 deductible
Of course, your specific circumstances may allow you to safely go higher or require you to stay lower than these general recommendations.
Other Ways to Reduce Insurance Costs
While choosing a higher deductible is one of the most effective ways to reduce premiums, it’s not the only method. Here are some other ways you may be able to save:
- Bundle home and auto policies with the same provider
- Raise comprehensive deductibles in addition to collision
- Take defensive driver courses to earn a discount
- Compare quotes across multiple insurers to find the best rate
- Ask about discounts available to you based on age, driving history, affiliation/group memberships, and more
- Optimize coverage limits to your specific needs
Combining a higher deductible with some of these other savings strategies can help maximize reductions in your insurance premium costs.
Pros and Cons of High Deductible Insurance Plans
|Must pay more out-of-pocket for small/moderate claims
|Incentivizes responsible use of insurance
|Risk of unexpected high bills if claims exceed deductible
|Customizable to your budget and risk tolerance
|Need enough savings to cover the deductible if needed
|Give you more control over spending
|May not be ideal for high-risk drivers
|Reward safe driving with lower costs over time
|Dropping collision not advised for newer cars
Is a High Deductible Right for You?
Here are some final considerations when deciding if accepting a higher deductible makes sense for your situation:
Do you have ready access to deductible funds if needed? You’ll want to have at least the amount of the deductible set aside in savings in case you need to pay it.
Can you afford the premiums even without a high deductible? For some very high-risk drivers, a policy with minimum required deductibles may still have high premiums. In that case, raising the deductible may help make costs affordable.
How new/valuable is your vehicle? On an older car worth less than $2,500 for example, accepting a $1,000 deductible or dropping collision entirely may make more sense than paying for a low deductible.
How risk averse are you? If peace of mind is your top priority, a lower deductible may help you avoid anxiety over large out-of-pocket costs.
How much can you save? Crunch the numbers for your particular policy. A $250 increase may save you $50, while bumping it up $500 might save $150. Evaluate if the savings outweigh the added risk.
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