Question: Can you explain what a deductible is?  I don't know what amount to choose for my collision and comprehensive deductibles because I don't understand how exactly it all works.

Answer: A deductible is the amount that you agree to pay out of your own pocket before your car insurance benefits start up after you've filed a claim. Once your deductible amount is paid, then your auto insurance company should pay the remainder of the claim, up to your policy limits.

Not all car insurance coverages have deductibles associated to them.  For example, liability coverages don't have deductibles, some coverages such as personal injury protection (PIP) and uninsured motorist might, depending upon your state and insurer, and physical damage coverages of collision and comprehensive always will, unless you choose $0 as your deductible amount. 

You may have one or several deductible amounts to choose at the inception of your policy.  We'll stick to examples with collision and comprehensive coverage since you asked about them specifically, but the same general principles apply to any coverage with a deductible.

How does a deductible work?

When buying physical damage coverages you are offered deductible amounts that can range from as low as $0 to as high as a $2,500 (or more with some insurers); however, the most popular deductibles choices are $250, $500 or $1,000.

Let's say you have chosen a $500 collision deductible  and get into an auto accident that causes $4,000 in damages. After filing a collision claim, you'd pay the repair shop the first $500 and your auto insurer would pay the remaining $3,500. 

If your vehicle is worth only $4,000, then your car would be deemed a total loss. Instead of you paying the $500 deductible, that amount would be deducted from the actual cash value of the vehicle (the most your insurer will pay out under collision or comprehensive coverage), and you would receive $3,500 from your insurer.

If the damage to your vehicle were only $450, instead of $4,000, then there would be no reason to make a claim since your collision benefits only kick in once the repair costs are over $500, and thus you'd be responsible for the whole $450 repair bill.

Your deductible is normally due whether you're at fault or not (there are a few exceptions, such as the comprehensive deductible for windshield claims in some states).  If you're not at fault in an accident and don't want to pay your deductible, then you'll need to go through the at-fault party's property damage liability coverage to make your claim. 

What amount should I choose?

The more financial risk you place on your auto insurance provider, the more you'll pay in premiums. 

  • A lower deductible means you pay less out-of-pocket when a claim is made, but you'll pay more in premiums.
  • A higher deductible means that you'll pay out more when filing a claim, but you'll pay less in premiums throughout the year.

Our philosophy is that insurance is for the big things, not the little ones. We recommend that you pay for minor damages without involving your insurance company. File a claim only for damage you cannot afford to fix yourself. If you make claims for every minor scrape, the number of claims will cause your premiums to go up even more.  If you make enough claims, your insurer may decide not to renew your policy.

Most small repairs aren't worth filing a claim over. For example, a $500 dent repair would bring you a check for only $250 once your $250 deductible is paid -- and it could start the clock ticking on higher rates at renewal time that could ultimately cost many times more.

That means you should choose a deductible that you can afford, but high enough so that small scrapes and bumps fall beneath that limit.   (See ”Will higher deductibles save you money?”)

If you choose a $1,000 deductible, you could save money on your premiums, but you need to make sure you can come up with $1,000 if you need to make a claim. Otherwise, your car may be sidelined until you can come up with the money. (See “What if I can't pay my deductible?”)

To help decide not only what deductible amounts you should choose but also what coverages may be appropriate for you, try out CarInsurance.com's coverage calculator.   

You can also see how different deductible amounts will affect your rates by comparison shopping for car insurance quotes.  Our quoting system allows you to get a quote and then go back to edit your deductible amounts and get updated quotes to see how the change affects rates. 

The original article can be found at CarInsurance.com:
How should I choose a deductible?