How Do Car Insurance Deductibles Work?

What is an insurance deductible?

A car insurance deductible is the amount the policyholder has to pay out of pocket before the insurer begins paying out for a covered loss. Basically, it's the portion of the damages or losses after an accident that must be paid by the vehicle owner.  

For example, let's say you have a policy with collision coverage and you're in a car accident. Your car has $10,000 of damages, and you have a $1,000 deductible. When you take your car in for repairs, you're responsible for paying the first $1,000 to the repair shop, and your insurer will cover the remaining $9,000.  

Unlike much health insurance coverage, insurance deductibles don't work on an annual basis; instead, they apply to each claim you make. For example, if you have a $1,000 collision deductible and you are involved in three accidents in one year, you'll pay $1,000 each time ($3,000 total) to repair your vehicle.

When auto insurance deductibles come into play varies by the type of coverage.

Liability insurance 

Liability insurance is legally required in nearly every state for drivers. There are two components: 

• Bodily injury: If you're in an accident and the other driver and their passengers are injured, this coverage helps pay for their medical expenses and care. 
• Property damage: Property damage covers damages you cause to another driver's car or other property, such as a fence or light post. 

With liability coverage, there isn't a deductible, so insurers begin paying out the claim to the other party without you having to pay anything out of pocket first. 

For example, you accidentally rear-ended a car on your way to work, and the other driver's car has some body damage, costing about $1,000 to fix. You have liability insurance, so your insurer covers the other driver's entire repair costs.  

Collision insurance

Collision insurance is an optional form of coverage, unless you finance or lease your car. It pays for damages to your vehicle if you're in an accident with another car or object, regardless of fault, such as a tree or guardrail. 

Collision coverage typically has a deductible, which you'd pay before your insurer covers the remainder of the cost of repairs.

Comprehensive insurance

Comprehensive insurance, also known as other than collision coverage, is another form of optional car insurance, unless you finance or lease your vehicle. It pays for damage to your vehicle caused by non-collision related accidents. For example, if a hailstorm or falling tree limb damages your car, or it is stolen, comprehensive coverage can apply.

Like collision coverage, comprehensive insurance usually has a deductible, which you'd pay before your insurer covers the remainder of the cost of repairs. 

How do deductibles affect car insurance premiums? 

When determining your premium, insurance companies look at several variables, including your location and driving history; the make and model of your vehicle; how many miles you typically drive; and your coverage selections. 

Another factor that affects your premium is your deductible. In general, the higher the deductible, the lower your premium will be, since you're covering more of the cost of any insurance claims.  

However, keep in mind that a higher deductible means you'll have to pay for a larger chunk of repairs or damages. Consider the following as you decide how big or small that deductible should be.

How should I choose a deductible? 

You have a lot of flexibility when it comes to choosing a deductible. The most commonly selected deductible is $500, but insurers usually offer deductibles ranging between $0 and $2,500. 

Choosing the right deductible amount when you buy car insurance can be tricky. If you opt for one that's too low, you could pay a much higher premium for coverage. But, if you select a higher deductible, you risk having to pay hundreds or even thousands before your insurer starts covering the repair bill. 

Before selecting a deductible, ask yourself the following questions: 

• How likely is it that I'll be in an accident? Think about your past driving history, your location and typical commute. If you live or work in a congested area or have a lengthy commute, you're more likely to be involved in an accident, so a lower deductible may make sense. 
• Is my area prone to serious weather issues? If you live in an area that has serious weather events, such as hurricanes, blizzards or wildfires, you may want to select a lower deductible for your comprehensive coverage. However, if you live in a relatively safe area where weather damage is rare, a higher deductible may make sense. 
• How much of a financial cushion do I have? With a higher deductible, you have to pay for a larger portion of your car's repairs. If you have a substantial emergency fund, that consequence may not be an issue. But, if you have only a small safety net or are living paycheck to paycheck, having to come up with the deductible may be difficult, so a lower deductible may be a better choice. Settle on an amount you feel you could readily cover in the event of an accident or other calamity that affects your car.