Demystifying Auto Insurance Deductibles

Insurance is the transfer of risk from an individual to a group. In simpler terms, we all pay a premium but often can make claims larger than the premiums we’ve paid. 

Let’s say you pay $1,000 per year to insure your car. In a collision claim, the insurer might pay you several times that amount. There’s a lot of complicated math that goes on in the background, but in effect, we’ve transferred our risk of a large loss in exchange for a smaller premium.

But we can’t transfer all the risk. That’s where deductibles come in.

Your deductible is the amount the insurer will “deduct” from a covered claim payout. For example, if you have a $1,000 deductible and a $7,000 claim, the insurer will pay $6,000 for the claim. With this possibility in mind, it makes sense to build an emergency savings account. It also makes sense to weigh deductible amounts carefully before choosing a higher deductible.

In practice, a deductible works like a limited form of self-insurance. You’re not self-insuring the entire loss amount, but you’re putting some money at risk to help keep your premiums lower. With collision coverage in particular, you can often see a meaningful drop in premiums by choosing a higher deductible. 

An auto insurance policy often has two or three different types of deductibles, depending on where you live. For instance, in New Jersey, you might have three deductibles: collision, comprehensive, and personal injury protection (PIP). In other areas that handle medical coverage differently, you may only have deductibles for collision and comprehensive. Of course, if you don’t have these coverages, you might not have any deductibles. Instead, you accept the entire collision of comprehensive risk yourself.

The type of claim determines the deductible. If you have a comprehensive claim due to a branch falling on your car with no injuries, your collision and medical deductibles don’t come into play.
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And some parts of your coverage don’t use deductibles at all. Liability insurance coverage, often described as insurance for others, does not use a deductible. If your insurer pays a liability claim on your behalf, you won’t pay a part of that claim, and no amount is deducted from the claim settlement. 

Discuss your deductibles with your agent or broker

In many cases, you can save money on premiums by choosing a higher deductible, but some coverage types see greater savings. Choosing a high deductible for comprehensive coverage, for instance, doesn’t always translate to huge savings. By contrast, collision deductibles can have a greater effect on monthly insurance costs. But it’s also important to choose a deductible that fits your budget. If you have a claim, the deductible is real money that may have to come from savings or credit lines.