Choosing an auto insurance deductible can result in severe financial implications if not done right. Deductibles are indeed a source of confusion and frustration for many people, especially considering the variety of options available. It’s not easy to decide whether to go for a high premium or high deductible with car insurance.
The most common auto insurance question asked is if one should opt for an auto insurance deductible of 500 or 1000?
Understanding the low and high-deductible plans and monthly premiums can certainly help you make the right decision. First, however, you must weigh the various factors involved, such as your budget and other related circumstances.
Let’s look at all the factors.
What Is a Deductible?
Deductibles apply to certain insurance options. For example, there is no auto insurance deductible on a liability claim.
A deductible is an agreed-upon amount that you have to pay on your own after getting in an accident and filing a claim. Let’s have a look at an example. You back up your car and collide with a fire hydrant that results in $3,000 worth of repair costs. To ensure your auto insurance covers the repairs, you will have to file a collision claim. If you opt for a $500 deductible, this is the sum you’ll have to pay, and your insurer will cover the remainder of $2,500.
The most common levels of an auto insurance deductible are:
How Do Deductibles Work?
You have to determine the amount of deductible when you are buying auto insurance. If you get involved in an accident and file a claim, the insurance provider will subtract the deductible from the covered claim.
If the damage is major, you will pay the deductible, and the insurer will cover the remaining amount. However, if the damage is minor, many drivers prefer to pay out of pocket instead of paying a deductible.
When you opt for a high deductible in your auto insurance policy, you will end up paying a lower premium. For example, you can actually save some money when selecting a $1000 deductible over a $500 one. However, this might or might not make much sense depending on individual circumstances and your insurance costs.
Moreover, if you live in a no-fault state, your insurance provider will have to cover the cost of medical bills irrespective of who caused the accident.
Collision Deductible
Collision insurance covers the damage your vehicle experiences after hitting something, including an object, another vehicle, a house, or a guardrail. If you are filing a damage claim under collision insurance, you will have to pay a deductible.
Comprehensive Deductible
Comprehensive insurance fills in the gaps that the collision coverage leaves behind. For example, damages occurring to your car outside of collision coverage are included in comprehensive coverage. Moreover, weather-related damages, theft, and vandalism are also covered.
A car insurance deductible will apply in most situations, but there can be a few scenarios when you don’t have to pay it. For instance, some insurance providers may repair a cracked or chipped windshield without you having to pay any deductible. In addition, some insurers even offer a “disappearing deductible” program that reduces your deductible for every claim-free period. Why don’t you shop around to get the best offer for your needs?
How Do Different Deductible Levels Affect the Insurance Premium?
All auto insurance companies have a different ratio of deductible and premium, which varies between states based on their regulatory approach. Every state has different policies and guidelines related to incorporating a deductible in the auto insurance policy.
Raising your deductible from $200 to $500 could decrease the comprehensive and collision premium cost by up to 30%. Meanwhile, if you increase the deductible to $1000, it could reduce the premium to 40% and more.
Since the deductible amount is inversely proportional to the amount of the premium you have to pay, the higher your deductible, the lower your premium rates will be.
Typically, people opt for an auto insurance deductible of 500 or 1000. Some prefer to go even higher than that to pay lower premiums. However, this can make the expenses less predictable as you don’t know when you will end up with higher repair bills.
On the other hand, others wish to have more financial security, so they go for a lower car insurance deductible and a higher premium. They don’t want to stress about finding a large amount before their insurance provider starts paying for the damage. In addition, this makes the expenses more predictable.
Is 500 or 1000 Deductible Better?
Since a 500 or 1000 deductible is the more popular choice, you might wonder, “Is it better to have a $500 deductible or $1000?
With a $500 deductible, the insurance provider will cover $4,500 for a $5000 claim. If you opt for a $1000 deductible, it means you will get coverage for $4000. This shows that your insurer provides more coverage with a low deductible. However, you will have to pay a higher amount of monthly premiums to balance the higher coverage.
The deductible amount mainly depends on how much you can afford to pay right now and whether you own enough savings to cover the damage in case of emergencies in the future.
With a lower deductible, you don’t have to pay a lot out of pocket at the time of an accident but have to pay higher upfront premiums. In contrast, with a higher deductible, you’ll pay more out of pocket for damages and lower premiums.
While you can save around 10% on your premiums by raising a deductible from $500 to $1000, don’t forget to consider the state you live in. Usually, a quote for a $50 deductible is provided by the auto insurance companies. This means you can determine how things could change for your policy if you increased the deductible to $1000.
However, keep in mind that the premium savings you get from paying high deductible car insurance might not be proportional to the additional out-of-pocket expenses you may have to pay after the accident.
You have to determine the amount of premium you would have to pay with a higher deductible and figure out if those savings would be worth it. Otherwise, it’s better to pay higher premiums for a low financial risk, especially if your car’s worth is low.
Things to Consider When Choosing Between Auto Insurance Deductibles $500 or $1,000
As mentioned above, it’s essential to do your homework and compare the premium amount with another deductible to find the right option for yourself. For example, you can research different auto insurance companies and find out their premium quotes on both $500 and $1000 deductibles or higher ones if you can afford them.
Aside from the $500 and $1000 deductibles, insurance providers offer other choices that could be more suitable for you. You might be tempted to go with the lower premium, but you must consider the expenses you would have to bear in case of an accident.
You might not be able to get the damages covered if you opt for a $2,500 deductible without having sufficient funds to cover the cost. Therefore, determine a realistic amount that you would be able to pay in such a situation.
Let’s look at a few things you must consider before determining your auto insurance deductible:
- The value of your car
- Your monthly income
- Your monthly expenses
- Your reserve or savings funds
- Available revolving credit
No matter which deductible amount you go with, ensure you have sufficient funds to cover it before filing a claim.
Does Increasing Your Deductible Save Money on Auto Insurance?
Increasing the deductible can help you save money on your auto insurance. The premium rate will reduce if you opt for a higher deductible. How much will you get? It depends on your policy, the insurance company, the state you reside in, and other factors.
Those who have a car loan or own a new car model may need full coverage, which includes comprehensive and collision insurance. If you’re wondering how the price would change for a $1000 deductible if you opted to reduce your comprehensive to $100 and collision to $500, contact your insurer.
If you own continuous insurance and have a good driving record, reducing your deductibles could only add around $20 to the monthly bill. However, if you had an accident and filed a collision claim, you’ve saved $760. All in all, you need to go a long time without a collision claim to make your $1000 deductible worthwhile.
For many, coming up with $500 is much easier than $1000.
How Do Deductibles Affect Car Insurance Rates?
The lower the deductible cost, the higher the amount of premium you’ll have to pay annually. The deductibles start from $250.
It’s best to consult your auto insurance provider to get the right offer, depending on your situation.
What Is the Payback?
The payback is another thing to consider when you are deciding on the deductible amount.
You can make calculations to determine the amount you would save with lower and higher deductibles. For instance, if you switch from $500 to $1000 deductible, you’ll save 10% on your premiums annually. With a $500 deductible, your annual premium would have been $800. However, it’s going to be $720 with a $1000 deductible instead.
Now that you’ve raised your deductible by $500, your annual savings amount to $80. It means you’d have to wait more than six years to cover the difference. If you don’t get into an accident during this period, the increase in the deductible will be worth it. However, if you do get into an accident, you will pay more out of pocket.
It’s best to compare car insurance rates and discuss other factors with your insurance agent to find the right solution and make an informed decision.
What to Consider Before Raising Your Deductible
Before you decide to increase your deductible amount, consider the following:
The Actual Cost of Your Insurance Policy
An increase in the deductible amount offers a percentage discount on the overall insurance policy cost. If you spend only $300 on the coverage, you would need a major discount to enjoy real savings, particularly in comparison to the cost of filing a high-deductible claim.
For instance, you can save around $30 annually when you pay a $1000 deductible in a claim. Why not opt for an option that helps you save $100 annually instead? It’s important to consider your situation and discuss your options with your insurance provider to determine if the annual savings make sense.
What’s the Downside of a High Deductible?
Let’s understand this using an example.
Suppose an unknown driver sideswiped your car that resulted in $800 worth of repair cost. Unfortunately, you have a $1000 deductible, which means you will have to pay $800 yourself. However, if you had a $100 deductible, you would only have to pay $100 and save $700.
Is It Better Financially to Have a Low Deductible and a Higher Premium?
You have to determine if you can afford to pay a higher premium. For example, you might go through a period of 10 years without filing a claim, which means you’d end up paying more money in total premiums than the person with a higher deductible.
At the same time, you might file more insurance claims too. It’s really up to you to make a decision and weigh all pros and cons.
How Often Do You Make an Auto Insurance Claim?
To solve the high vs. low deductible car insurance conflict, you have to consider the number of auto accident claims you have made in the past.
If you are an excellent driver with no major accidents, you can risk choosing a higher deductible. But again, it is still a risk. It doesn’t matter if you’ve never made a claim before; you might need to in the future. Keep in mind that the deductible amount presents a direct impact on your finances when you file a claim.
If you have made many claims in the past, it means you may already be paying a lot in terms of auto insurance. In such a situation, lowering your deductible to save money on your claims would make more sense. It’s always a good idea to negotiate for a better price with your provider if you decide to pay a higher premium.
If a higher deductible is in your budget and you don’t make insurance claims, increasing the deductible amount could work for you too.
Tips to Increase Your Deductible
If you want to increase the deductible amount, here are a few tips:
- Be sure to get insurance quotes from multiple auto insurance providers and compare them. Remember, the amount you save will depend on the premium amount, how much you want to increase the deductible amount for, and the state you live in.
- Make sure to consider the risks involved. For example, while saving some money on your premiums is great, it might cost more to file a claim. So, take into account all the factors, including your driving record, which state you live in, and the risk of natural disaster or crime rate in your area.
- Determine how much premium you can afford and where the money would come from in case of an accident. Then, be sure to budget the deductible amount in your emergency savings. Keep in mind that if you have to cover the repair expenses with your credit card, the high interest rate will eat up the savings you might have received from increasing the deductible.
- Establish a long-term plan for savings and bank the money you save from the premiums.
How Does a Person’s Driving Record Affect the Choice of Deductible?
The cleaner your driving record is, the more you should consider a higher deductible plan that will, in turn, reduce your premiums.
On the other hand, a driver with a poor driving record should opt for a lower deductible.
Wondering how to check my driving record?
The easiest way to check the driving record is by contacting your licensing office or local DMV. In addition, numerous states have made driving records available online. However, to get an official record for either employment or court, you have to request it in person or through the mail.
Conclusion
Opting for the right deductible amount, depending on your needs and financial situation, can help you save hundreds on your auto insurance policy. If you choose between an auto insurance deductible of 500 or 1000, consider various factors highlighted in this article and discuss your options with your insurance agent.
Avoid raising your deductible merely because of your inability to make annual or monthly payments. Instead, do proper research as there are other ways to reduce insurance premiums. Your auto insurance agent can evaluate your situation and determine the best possible savings options for you.
