In the world of auto insurance, the deductible is a powerful little thing. And yet, it’s an easily misunderstood concept.
Despite its name, a deductible actually has little to do with deducting — at least not for you. When your insurance company finds you at-fault or partially at-fault for a collision, your deductible is the amount you’ll be on the hook for to cover the repair costs. In other words, it determines how much your insurance company can deduct from what it owes you.
Not only does your deductible dictate what you’ll pay out of pocket, but, depending on what you set your deductible to when you sign up for a policy, it also has the ability to lower your premiums.
Here’s everything you need to know about your auto insurance deductible.
It’s what you’ll have to pay in the event of an at-fault claim
A deductible is the amount of money you’ll be required to pay out of pocket in the event that you file a claim and are found at-fault or partially at-fault. The deductible helps cover the costs associated with the claim.
For example, let’s say your deductible is $1,000. If you get into an at-fault (or partially at-fault) collision and it costs $2,000 to repair your vehicle, then you will be responsible for $1,000, and so will your auto insurance company.
Of course, if you were found completely not at-fault for a collision, then chances are good you won’t have to pay a deductible at all, and your insurance company will cover all the costs related to your claim.
When it comes to claims that are covered by comprehensive coverage (where your vehicle is damaged due to something other than a collision, like vandalism, theft, or fire), however, you’ll almost always have to pay the deductible.
It only applies if you have comprehensive and collision coverage
A deductible only comes into play when you have comprehensive coverage, collision coverage, or both, on your vehicle. If you decide to carry only liability coverage, which protects you in the event that you injure someone or their property with your vehicle and they sue you, then a deductible won’t apply.
If you’re carrying both comprehensive and collision coverage, you’ll need to select one deductible for each, and they can be different amounts.
You should also decide whether or not it’s worth it to carry a deductible on an older vehicle. For instance, if your vehicle isn’t worth that much money anymore, it might not make sense to have a large deductible on it, because it could end up costing you more than the vehicle is worth.
A higher deductible will usually lower your premiums
By choosing a higher deductible when you sign up for a policy, or raising it upon renewal, you could substantially lower your auto insurance premiums. That’s because you’re agreeing to take on a larger part of the claim costs.
But that means you need to give serious consideration to what you could handle financially if you had to pay your deductible for either comprehensive or collision coverage. Is $500 all you can afford to cover? Or is $1,000 doable? What about $2,000?
When you’re comparing auto insurance rates, play around with the deductible amount and see what it does to your premiums. But just remember: if you get into a collision and your deductible is applied, it’s you who’s going to have to deal with that financial burden. So make sure it’s something you can handle.