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UPDATED: Mar 13, 2020
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Your monthly auto insurance premium is based on several factors:
- Age and demographic information – Your age and demographic information has to do with the actuary and statistical information that the insurance companies access a database on the likelihood of death at certain ages and statuses. Even though it’s just a statistic, the averages do pan out. Insurance companies prefer not to take a financial risk with high-risk ages, so that’s why young people ages 18-24 have the highest insurance rates. They have the highest accident rate.
- Car make, model, and year – The car make, model, and year helps determine the cost of your premiums as well. Sporty or luxury cars are more expensive than older, simpler ones.
- Traffic violations and driving record – The most important factor in calculating insurance premiums is your driving record.
Because all of these factors influence how much you pay in insurance premium costs, you may be searching to cut costs wherever you can. One area that could influence this cost is your car insurance deductible.
Choosing Your Deductible Amount
Deductibles in car insurance, as in health insurance, are amounts that you must pay out of pocket before your insurance will kick in. Deductibles range from around $500 to $2,500 or more. You should consider carefully whether you want to have a lower deductible or a high deductible.
Advantages of a Low Deductible
If you have a low deductible, you will pay less out-of-pocket when an accident occurs. Imagine having an accident that costs $750 in damage to repair. If you have a low deductible of only $250, this means that you would only be out $250 before the insurance company covers the rest ($500).
Disadvantages of a Low Deductible
A low deductible (around $250-$500) would mean that your monthly premium will be higher than it would be if you had a higher deductible. This is because the insurance company would have to pay more money if a claim were to be filed due to an accident.
Advantages of a High Deductible
A high deductible means that your insurance premiums will be lower because you are stating that you are willing to pay more out-of-pocket before the insurance company has to pay.
For example, in our same fictional accident where there was $750 in damage to the body of your car, if you had a $1000 deductible, this means that you would have to pay up to the first $1,000.
Then, if the damage were more costly than that, the insurance company would pay the rest.
Disadvantages to a High Deductible
The main disadvantage of a high deductible is that you will have to pay more before your insurance will pay. If you can afford to do this, then a high deductible is a good choice for you.
Both of these options are viable options, depending on your situation. In general, a high deductible means lower premiums but less help with claims. A lower deductible means more help from the insurance company to pay the repairs, but it will cost you more in premiums.
The difficulty of choosing a deductible should cause you to think carefully about the potential costs for each choice before you make a decision.
Other Questions to Ask Yourself on Saving Money and Choosing Your Deductible
You should consider these factors to aid in your decision on a high or low deductible.
- Does the car insurance you are considering pay claims quickly?
- How much savings do you have stocked away for emergencies?
- Is your budget in good shape or do you struggle to pay bills each month?
- How much could you afford to pay in out-of-pocket expense?
- How much difference will a high deductible make in your monthly premium?
All of these questions are good ones to consider to make the best decision regarding deductibles. If you have money saved up for emergencies that would allow you to pay for unforeseen accidents or expenses, a high deductible may work fine for you.
If your insurance company you are considering pays off claims quickly, this is an advantage to having a lower deductible.
Many people drive around with an accident claim pending for a long time before it is fixed, which is never a good idea.
Can filing a claim raise my insurance rates?
Yes, even filing a claim could potentially raise your rates on your car insurance premiums, even if it is not your fault. But the most important factor is your driving record.
Consider how much you could afford if you had an accident and how much cash flow you could access and let that guide your decision.