How Deductibles and Coverage Amounts Affect Your Costs

We've already covered the basics of what a deductible is in car insurance, but let's talk a little bit more about this aspect of your insurance coverage and how it an affect your rates.

WHAT A DEDUCTIBLE IS

Again, the deductible is the amount off the top of your insurance policy that you would need to pay out of your pocket for damage or injuries before your insurance policy starts to pay.

Most deductibles are either $100, $250, $500, or $1,000.  Some insurance companies offer deductibles in the amount of $2,000 but this is rare.

There are a few reasons why insurance companies have deductibles.  First of all, it keeps people from filing claims for every little dent and ding in their car.  Imagine if insurance claims were filed every time someone noticed a scratch or tiny flaw, claiming that someone must have hit them or vandalized the car.  But if people know that they need to come up with at least the first $100 of any repair they're much less likely to go through that for every little thing.

Also, this cuts down on some cases of insurance fraud.  If you want your car repainted it would be easy to scratch it up yourself and then make a claim on your insurance, if that company covered every little minor detail.

HOW DEDUCTIBLES AFFECT YOUR PREMIUM

You may already know that a higher deductible means a lower premium, and raising your deductible is one of the easiest ways to lower the cost of your insurance overall.

The reason that insurance companies operate this way is because they know that if you're willing to pay more of the expense of repairing your car or taking care of your medical expenses yourself in case of accident or injury, then this saves them quite a bit of money so they can pass that savings on to you.  The more financial liability you take on when an accident does happen, the less your monthly premium will cost.

On the other hand, someone that has a very small deductible is saying that they're not going to handle virtually any of the costs of an accident or injury themselves so the insurance company will have a much larger expense overall in those cases.  To protect themselves they then charge you more when your deductible is low.

A deductible is one easy way to adjust the monthly premium you have, but unfortunately not all insurance agents offer you these different options when writing your policy.  Of course part of that is a protection for you as many people couldn't handle the $1,000 charge to repair their car if their deductible was that high and the insurance company doesn't want you to have any surprises at that time.

However it is good to know that you do have these options available to you so that you can tailor make your insurance policy to fit your particular financial situation.

WHAT TO CONSIDER

Before you just run right out and raise your deductibles in order to lower your premium, you need to give this some serious thought and consideration first.

For one thing, be honest with yourself about what kind of driver you are.  If you're aggressive and have a tendency to speed and weave in and out of lanes, then you're more likely to be in an accident whether you've actually gotten a lot of tickets or not.  Having a high deductible might cost you more in the long run if it means paying an additional $1,000 for an accident.

You also need to think about the type of car you drive.  If it's newer and more expensive you might want to have it repaired even if you're involved in a minor accident, and of course if you have a car loan or are leasing you may be required to do that.  Having a high deductible can again cost you more in the long run.

On the other hand, having an older car that you're not very concerned about repairing for every dent and ding, and if you truly are a cautious driver then you might be able to get away with a higher deductible.  Again, consider this carefully and get some different quotes from your agent with different deductible amounts so you can see how much you would be saving, if any at all.

COVERAGE AMOUNTS

It's surprising how many people assume that the amount of money your insurance company will kick in when there's an accident or injury is just set, like how your bank's interest rate is a certain percentage, period.

In reality you can actually pick and choose how much your insurance will cover in those cases typically from a few standard options.  For instance, most offer a policy that pays up to $20,000 for bodily injury and up to $10,000 for property damage.  This is usually the lowest rate that any insurance company offers.

In most cases you can opt to have more coverage than that, but of course this too affects your premium amounts.  If you want more coverage it's going to cost you more per month.

Some insurance companies won't tell you that you have these options and will write up a policy that is the most expensive, giving you the maximum amount of coverage available.  This might be good if you ever are in an accident or get injured, but it might not be what you personally want.  For example, take the example of someone that is self-employed, working from home, and doesn't go out that often.  That person may realize that the risk of a car accident for herself personally is rather low and so may opt for smaller coverage amounts in exchange for that lower monthly payment.

Also, the amount of medical coverage you have through your work or just personally can also affect this.  If you have very good medical insurance you may not need that extra coverage from your auto insurance.

But as with deductibles this is something you need to think about personally and make your own decision about.  No one should tell you to opt for the small coverage amounts just to save a few dollars every month; what happens if and when you are in an accident?  Also, if you have a lot of assets to your name and make a decent salary, it would be more tempting for someone to sue you if you were at fault in an accident and your coverage didn't pay out the amount of money they need for repairs or injuries.

Judgments typically are tailored according to a person's ability to pay; if a judge sees that you have a boat or RV or vacation home or something else he or she considers to be a luxury, the court may very well seize these things for payment of the other person.  If you do have assets and want to protect them, you may want to raise your coverage amounts.

These types of risks and decisions are things you simply need to consider for yourself and make the best choice you can.

COMPARING AMOUNTS

To really illustrate how deductibles and coverage types affect your insurance rates, let's look at the same quote for insurance from an online company with different deductible and coverage rates.

Note that we changed no information about the driver, location of the vehicle, or anything else.

For this policy we opted for the lowest deductible amounts possible, $250 for both Comprehensive and Collision. 

We also opted for the lowest amounts of coverage for Bodily Injury ($20,000/$40,000), Property Damage ($10,000) and Uninsured Motorist ($20,000/$40,000).

The price for this coverage is $1,477.80 for six months, or $281.09 per month.

In this scenario, we keep the deductibles the same but have raised the amount of coverage offered to the maximum amounts.  Now Bodily Injury is at $100,000/$300,000, Property Damage is at $100,000, and Uninsured Motorist is at $100,000/$300,000.

The price for this coverage is $1,527.40 for six months, or $290.39 per month.  This is an increase of about $50 for that six month period.

Now we've gone back to the minimum amounts of coverage for Bodily Injury ($20,000/$40,000), Property Damage ($10,000) and Uninsured Motorist ($20,000/$40,000).  However we've raised our deductible from the minimum $250 to the maximum $1,000, meaning that you would pay up to $1,000 in the case of an accident or injury.

The price for this coverage is $1,194.50 for six months, or $227.97 per month.  This is a savings of almost $300 for this six-month time period simply by raising the deductible rate by the most it could be; again, if you pay more when there's an accident, you're going to pay less for the insurance premium overall.  The insurance company would save money in the case of accident or injury so they actually pass that savings on to you.

What's interesting about these types of coverage is that, like most other insurance companies, you can pick and choose from both your coverage types and amounts and your deductible amounts as well.

This means that you may want higher coverage in case of an accident but also don't mind paying a higher deductible in order to save yourself some of that cost.  Or maybe you are a very safe driver that doesn't go out that often and really don't worry about what will happen in case of an accident, and choose lower coverage amounts with the highest deductible in order to save yourself the most money you can every month.

Remember, Bodily Injury refers to the amount that your insurance company pays to another driver if you're at fault in an accident.  Again, if you have a lot of assets you may want to protect them by raising the coverage in these cases so that you're less likely to be sued in case you're at fault in an accident, or so that your insurance company will need to pay more and you need to pay less in those cases.

Choosing insurance coverage is something that you need to pick and choose according to what feels most comfortable for you.  This gives you the freedom to decide on what coverage you're going to get according to your needs, budget, and so on.