How does a car insurance deductible work?

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Here's what you need to know...

  • Knowing which type of car insurance to buy can be difficult
  • The type of vehicle you drive and your driving history play important roles in your monhtly premium
  • Liability coverage does not come with a deductible but comprehensive and collision cover do

When you are buying auto insurance, one of the most difficult tasks will be deciding — which coverage options to add to the policy and which limits are sufficient.

If you have decided that it is best to buy full coverage on your vehicle, you will then need to decide if you want to select a high deductible or a lower deductible.

Full coverage may not protect you against all of the perils as the term might imply, but it is designed to protect your vehicle against losses that can happen when the car is being operated or when the car is parked.

This is why it is crucial that you do your homework to decide which deductible you can reasonably cover at the time of a loss. Before you can commit to a specific deductible, you really need to understand how a car insurance deductible works.

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What is a car insurance deductible?

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You should know what a car insurance deductible is before you ever need to file a claim. Knowing the role of the deductible when you are insuring your vehicle is what will help you get the most out of your policy while you tailor it to fit in your budget restrictions.

Unlike liability coverage, which the state mandates that you carry, you have the option to buy physical damage coverage.

Liability coverage does not come with a deductible but comprehensive and collision cover do.

A deductible is a specific amount of money that you are obligated to pay when you experience an insured loss. They are part of the contract that dictates when and if a loss is severe enough to be covered.

If the loss is severe enough, the deductible amount will be deducted from the payout and you will pay the amount out of your own pocket. It is a way to transfer risk while still sharing some of it with the policyholder.

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High Deductibles vs. Low Deductibles

The deductible of your auto insurance policy is essentially the amount of money that you need to pay before your coverage will kick in. Only two coverage options, comprehensive and collision, are subject to a deductible.

The deductible for each of these coverage options sit on their own and they can differ. If you are concerned about paying high premiums, you might want to weigh the pros and cons of selecting a high deductible.

You can choose between deductibles that are as low as $50 and as high as $1000 with most carriers.

There are even a select few carriers that still offer the option for ‘no deductible’. When you elect to carry a low deductible, you will pay higher premiums for physical damage cover on your vehicle.

However, you raise your deductibles, you can save money off your the physical damage cover that so often makes a policy expensive.

What to Consider Before Choosing a High Deductible

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Choosing a high deductible is not always a wise option. After all, if you are buying full coverage, you want to be able to use it when you experience a loss and you need your vehicle repaired.

Deductibles are not one size fits all. Here are some important factors to consider before you choose the highest deductible available:

Stick with a deductible that you can afford to pay

You must think as if a loss is right around the corner when you are picking the dollar amount.

If you choose a $1000 deductible, you need to be sure paying that amount tomorrow to repair your car is not going to affect you financially.

Those who cannot cover their deductibles are left without a car and must pay for towing and storage fees out of their own pockets.

Check your contractual agreement with your lender

If your car is leased or you are making finance payments, you are under contract and that document says that you must buy comprehensive and collision coverage.

Unfortunately, you are not always free to select whatever deductible you would like.

Some lenders require you to select a deductible that is under $500.

Compare the Costs vs. the Savings

Selecting the highest possible deductible is not always the best choice.

If you are a preferred risk, increasing a deductible from $250 to $1000 will not always save you for the added risk that you are taking on.

Price the cost of premiums for each deductible so that you can do your own cost-benefit analysis.

When do you need to pay for your deductible?

You do not always have to pay a deductible when you file a claim. The only time that a deductible will apply is when you are filing a comprehensive claim or some at-fault collision claims.

Here is when your deductible will apply:

Comprehensive Claims

Comprehensive insurance is designed to pay for losses to your vehicle caused by things like fire, theft, vandalism, explosion, natural disaster, flood, and more.

While these are not-at-fault losses, your deductible will apply when you file the claim. The only time a deductible might be waived is when you are filing a glass breakage claim.

Collision Claims

If you are not-at-fault for a collision, it is still important to have collision insurance. Your collision coverage will pay if the party who hits you is uninsured or if there is a dispute between your insurer and the third-party insurer that delays the settlement process.

When the claim is settled and you are found to be not at fault, you may be reimbursed.

Deductible offerings can vary from company to company and from state to state. Make sure that you compare pricing with several options before jumping at the opportunity to select a 4 figure dollar amount.

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