Car insurance deductibles give your insurance company some measure of comfort that you and they are in this driving situation together. You both have something to lose financially if you’re distracted because you’re texting and you rear-end that automobile ahead of you. They can also provide you with a little bargaining power when it comes to the car insurance premiums you’ll have to pay.
Laws governing car insurance are set at the state level, not the federal level, and they can vary a little from state to state. Some common rules apply, however.
How Does a Deductible Work?
Let’s say that you’re involved in a minor accident and your car has suffered $500 in damage. Your insurance policy carries a $750 deductible on your collision coverage. Your insurer won’t contribute any money toward the repairs because the cost of putting it back together is less than your deductible. You’ve contractually agreed to pay the first $750 of any insurance claim you make, and $500 in damage minus $750 is a negative number.
Your insurer would send you a check for $250, however, if your car has $1,000 in damage and you have a $750 deductible. You’d pay the first $750 toward repairs, and your insurer would pick up the tab for the balance.
Now let’s say that it was a particularly bad collision and your car has been totaled. It can’t conceivably be restored to drivable condition. Your insurance company determines that its actual cash value after taking depreciation into consideration is $12,000. You have a $1,000 deductible. Your insurer will send you a check for $11,000. That’s the extent of what it will contribute to your new car. You’ll have to come up with cash or financing if you want to buy a new vehicle that costs more than $11,000.
You must pay the difference – or you’ll receive the difference – between the amount of damages you’ve incurred and the deductible you’ve agreed to pay. You don’t have to pay that amount to the insurance company if your deductible comes up short. The deductible is factored in when you make a claim and that claim is approved and paid. It’s applied per claim, not just once over the life of your policy or annually.
Read More: How Many Times Do You Pay an Insurance Deductible?
Are Deductibles Mandatory?
It’s possible not to commit to auto insurance deductibles on your car insurance policy, but only in some states. Your insurance would cover the entire amount of your claim in this case, assuming your claim is approved, but this might not be a perfect arrangement. You’d almost certainly have to pay much more for your policy if your insurer is willing to commit to paying 100 percent of any and all damage claims.
But there’s a flip side here, too. You don’t have to use any insurance payout to repair your vehicle or buy a new one when you make a claim – less your deductible, if you have one. No one says that you can’t drive around in a banged-up vehicle and spend the money on something else.
How Much Are Deductibles?
Your deductible might be as little as $100, or it could be as much as $2,000. Somewhere in the $250 to $500 range is typical. You can elect the amount of your deductible – it’s not assigned to you by the insurance company – so it basically comes down to how much you’re willing to personally pay if you make a claim, or how much you think you’d comfortably be able to pay.
USAA suggests that you might want to choose a deductible equal to or less than what you have saved in an emergency fund.
You Can Have Multiple Deductibles
You’re most likely not dealing with just one deductible on your policy. Different types of coverage you carry on your policy can be – and typically are – assigned different deductibles, although the liability coverage on your policy isn’t usually subject to a deductible, according to the Insurance Information Institute.
You might not have to factor in two separate deductibles if your car is damaged, because damage falls under either collision or comprehensive coverage, but not both. Each applies to its own type of damages. You wouldn’t make a claim under both coverages, so you wouldn’t have two deductibles.
You might be subject to more than one deductible, however, if there’s damage to your car (a collision coverage claim) and you or someone else is injured and you have a claim for medical expenses as well. These are two separate areas of coverage that can happen concurrently, and each would have its own deductible.
You can usually choose the deductible you want for each type of coverage.
The Effect on Your Premium
Your auto insurance premium will be less if you’re willing to contribute a higher deductible to any claims you make. Likewise, it will increase as you reduce your deductible amount. It comes down to how much you’re willing or able to pay out of pocket if you have to make a claim.
It won’t do you much good if you take on high comprehensive coverage deductibles to keep your monthly premiums at rock bottom if you don’t feel confident that you could lay your hands on a fair bit of cash to repair or replace your car if a tree falls on it. USAA recommends compromising at a middle point between the two options. You might also want to consider how likely you are to have to make a claim based on how many miles you typically drive in a year and the conditions under which you do that driving.
It might not make sense to pay a higher premium every month in exchange for low deductibles if you generally drive less than 10,000 miles a year or so because you’re less likely to become involved in a fender-bender if you’re just not behind the wheel that much. By the same token, you might not want to continually reach into your pocket for cash to meet your deductibles if you drive a great deal or often in adverse conditions that could result in an accident and a collision claim.
Read More: Does Car Insurance Go Down Over Time?
Other Factors to Consider
Another factor to consider is the age and value of your car. It might not be cost-effective to carry a high deductible on a vehicle that’s only worth a couple of thousand dollars to begin with.
Your deductible probably wouldn’t be a factor if you’re involved in an accident and not found to be at fault – it was caused by negligence or some action taken by the other driver. In this case, their insurance would foot the bill for any and all claims. You wouldn’t have to contribute a deductible if your insurance company doesn’t have to pay anything out, unless that other driver was uninsured or underinsured.
Your insurer would have to pay your claim in this situation, and this type of coverage typically comes with a deductible as well.
- Progressive: Car Insurance Deductibles Explained
- Allstate: How Car Insurance Deductibles and Limits Work
- GEICO: Understanding Car Insurance Deductibles
- Insurance Information Institute: Understanding Your Insurance Deductibles
- USAA: How Do I Set My Auto Insurance Deductible?
- Bankrate: What Is a Car Insurance Deductible?
- Insurance Information Institute. "Understanding Your Insurance Deductibles." Accessed Aug. 2, 2020.
- Progressive. "What Is an Insurance Rider?" Accessed Aug. 2, 2020.
- HealthCare.Gov. "Out-Of-Pocket Maximum/Limit." Accessed Aug. 2, 2020.
- Travelers. "Home Insurance Deductibles and Limits." Accessed Aug. 2, 2020.
- Allstate. "What Is Zero-Deductible Car Insurance?" Accessed Aug. 2, 2020.
- Mike Leonard Insurance Agency. "One Storm, Two Deductibles. How to Avoid Double Deductibles." Accessed Aug. 2, 2020.
- Hanover Insurance Group. "Understanding Waiver of Deductible Coverage." Accessed Aug. 2, 2020.
- HealthCare.Gov. "Deductible." Accessed Aug. 2, 2020.
- HealthCare.gov. "Deductible." Accessed Aug. 2, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.