No one plans to get into an auto accident. Likewise, nobody intends to have their vehicle stolen or vandalized. Yet, these unfortunate events occur, causing loss, damages, and sometimes, injuries. Auto insurance is designed to cover the costs that result from these and other incidents. Coverage provides consumers with financial protection when unexpected circumstances lead to auto repair bills, medical expenses, and lost wages.
The problem is, adequate coverage is often expensive. Accident benefits coverage, collision and comprehensive, and uninsured motorist coverages add up. You may be tempted to lower your coverage limits in order to trim your annual premiums. A better solution may be to raise your deductibles. Below, we’ll explain how they work, and the reason most people set them too low. We’ll also make the case for raising your own.
How Your Auto Insurance Deductibles Work
Your deductible is the amount you’ll be required to pay before your insurance company covers expenses related to the event that prompted your claim. For instance, suppose you have a $100 deductible on your collision coverage. On your way to work, you are involved in an accident that results in major damage to your vehicle. A mechanic reports the bad news: in addition to needed bodywork, your transmission was severely damaged and needs to be replaced. The cost is $4,000.
In this case, you would only need to pay $100 of the repair bill. Your insurer would pay the remainder ($3,900). If your deductible had been $500, you would have been forced to pay that amount, with your insurance company paying the remaining $3,500.
At first glance, you might be grateful, and even feel lucky, that you chose a low deductible when you established your policy. In reality, it may have been a poor financial decision.
Why A Higher Deductible Often Makes Sense
The lower your deductible, the higher your car insurance rates. You may not notice the difference month by month, but the extra premiums add up over time. To demonstrate, let’s return to our previous example.
Collision coverage represents approximately 20 percent of your total auto insurance bill (this percentage varies by insurer). Suppose a $100 deductible results in $425 in annual premiums. Suppose further that raising the deductible to $1,000 causes the collision portion of your premiums to decline to $250. You’ll save $175 each year.
The likelihood that you’ll be involved in an accident is very low. The odds that such an accident will result in thousands of dollars in damage to your vehicle are even lower. Given this, it may make sense to raise your deductible to $1,000 in order to save $175 each year. In five years, you’ll save $875 (other variables remaining the same).
With a $1,000 deductible, you’ll pay $900 more than previously. If you can avoid damage to your car for longer than five years, you’ll end up ahead. The $175 in savings will continue to add up each year.
Other Ways To Save Money On Car Insurance
Raising your deductibles is a quick way to lower your rates. But there are several other ways to do the same. For example, ask your auto insurer whether you qualify for discounts. Many insurance companies will reduce your premiums if you are a retiree, install an alarm in your car, or have passed a driver training course. Discounts may also be given for insuring multiple cars or bringing your property insurance policy to the same company.
If your vehicle is old, think about dropping collision and comprehensive coverages. Together, they comprise up to 40 percent of your total premiums. Dropping both can result in a substantial drop in your annual bill.
Also, each time you are about to renew your policy, take a few minutes to compare competing quotes from multiple insurance companies. Most consumers neglect to shop around, even though doing so can produce large annual savings. Break the habit of simply renewing your coverages.
Review your deductibles with an eye toward raising them. You may find that keeping them low is costing you more money than you realize.