A deductible is the amount you pay yourself when you make a claim, before your insurer pays the rest. It is one of the easiest things to change on a policy, and it directly affects your price. It is also one of the choices people make most casually, often by clicking the default option on a quote form. A few minutes of thought can save you money now or protect you from a nasty surprise later.
How deductibles work
Suppose you have a $500 deductible and a collision claim for $3,200 in repairs. You pay the first $500, and the insurer pays the remaining $2,700. If the repairs cost $400, you pay all of it, because it is below your deductible, and there is nothing to claim.
Deductibles apply to collision and comprehensive coverage. They do not apply to liability, which pays for damage and injuries you cause to other people. Typical options range from $250 to $2,000, with $500 and $1,000 the most common.
The trade-off between premium and risk
If you choose a higher deductible, your premium is usually lower, because you are taking on more of the cost of a claim. If you choose a lower deductible, your premium is usually higher, but you pay less when something goes wrong. The question is how much you are really saving.
Try a simple break-even calculation. Say moving from a $500 deductible to $1,000 saves you $15 a month, or $180 a year. You are taking on $500 of extra risk to save $180, which means it takes about three years without a claim to come out ahead. If you have a claim in year one, you are $320 worse off. If the savings are only $5 a month, the argument for the higher deductible is much weaker.
Questions to ask yourself
- Could I afford to pay this amount tomorrow if I had an accident?
- Do I have savings set aside for unexpected repairs?
- How much would I really save each month with a higher deductible?
- Do I drive in conditions that make a claim more likely, such as heavy traffic, hail-prone areas or street parking?
- How old is my car, and how much would a typical repair cost?
Think about your emergency fund
The most important factor is how easily you could find the money. The Federal Reserve’s annual survey of household economics has repeatedly found that a large share of American adults, more than a third in recent years, would not be able to cover a $400 emergency using cash or its equivalent. If that sounds like you, a $2,000 deductible is not really a saving. It is a bill you may not be able to pay at the worst possible time, and it could stop you from getting your car repaired.
A sensible approach is to choose a deductible no higher than the amount you have set aside for emergencies, and to build that fund over time.
Consider what your lender requires
If you are financing or leasing your car, the lender often sets a maximum deductible, commonly $500 or $1,000. They want to make sure the car can be repaired or replaced if it is damaged. Check your loan agreement before you choose a level, because a deductible above the lender’s limit may breach the contract.
You can have different deductibles
Collision and comprehensive can have separate deductibles. Many people keep comprehensive lower, since claims for theft, hail or a cracked windshield tend to be smaller, and collision higher. Some insurers also offer a separate, lower deductible for glass repair, or even a zero-deductible glass option. Ask what is available, since it can be a cheap way to avoid paying out of pocket for a common type of claim.
Small claims and your rates
The deductible is not the only cost of making a claim. An at-fault accident claim can raise your premium for several years, and multiple claims can raise it further. For that reason, many drivers decide not to claim for damage only slightly above their deductible. If you are inclined to handle small repairs yourself, a higher deductible can fit that approach, as long as you are truly able to cover those repairs.
A balanced approach
Pick the highest deductible you could comfortably pay, not the highest one available. If the savings are small, a lower deductible may give you better peace of mind. Revisit the choice every year. As your savings grow or your car ages, the right number may change.
What about “vanishing” deductibles?
Some insurers offer programs that reduce your deductible for each claim-free year. These can be useful, but they sometimes come with a higher premium or conditions you need to understand, so ask for the details in writing and compare the total cost.
Deductibles are one of several ways to keep costs down. See our no money down guide for more tips, then compare quotes with different deductibles.
This article is for general information only and is not insurance, legal or financial advice. Coverage, rules and prices vary by insurer and state.