How Do Deductibles Work?
A deductible in the auto insurance world is that amount of money that you will be responsible for first before your auto insurance company begins to cover costs. When you get involved in an accident, your insurance company covers the repair costs. Using a deductible, you can reduce the amount you pay in premiums. The higher the amount of the deductible the lower the premiums you pay.
Auto insurance policies are broken up into various kinds of coverage. Liability insurance which includes property damage and bodily injury damage do not usually have deductibles attached. In general, deductibles only apply to two types of coverage:
Collision Coverage – this covers any damage done to your car when you are involved in an accident with a stationary object or another vehicle. It covers the repair costs and replacement of parts for your vehicle. It is important to note that it does not include the damage you cause to other people’s property.
Comprehensive Coverage – this covers any damage to your car in all possible scenarios other than an accident which you caused. It includes things like hail, falling trees, among other types of damage to your vehicle.
When Your Deductible is NOT applicable
When another driver hits you – when you are not at fault in an accident, the other party is responsible for the damages hence you don’t need to pay.
You don’t repair the vehicle - most insurance companies allow you to choose whether or not to repair your vehicle. If you choose not to repair, you don’t have to pay the deductible amount. However, the insurance company will still pay you for the cost of repairs (minus the deductible).
How the Deductibles Work
Your deductible, usually around $500 is first applied to any damages sustained on the vehicle. For instance, if your vehicle crashes where your collision coverage is applicable and the repairs add up to $4,000, you would be in charge of paying the first $500 of the repair costs. The remaining $3,500 is covered by your auto insurance company through the collision coverage. However, if the repairs cost less than or equal to the deductible amount, you will be fully in charge of the repairs.
Choosing the perfect deductible amount
When choosing your deductible amount, you want to balance between having an amount that is not too high that you can’t pay if needed and at the same time high enough to lower your premiums to your desired amount.
Your first consideration is how much you can comfortably pay out of pocket in the event of a crash. The deductible should be set to an amount that you can pay comfortably without impacting your lifestyle or financial situation.
It’s also vital to remember that since vehicle insurance deductibles are on per-claim basis, the frequency of the claims also matters a lot. For instance, if you have a $500 deductible then you had four different claim of less than the $500; you would be responsible for all the payments meaning the insurance company is actually providing no coverage at all.
If you have limited wiggle room in your income or just some little money saved up, you should choose a policy with low deductible to reduce exposure to financial risk.