How high should you set your collision deductible? What are the pros and cons of raising your deductible? Today, we’re explaining everything you need to know about setting your collision deductible.
How Car Deductibles Work
A car insurance deductible is the amount of money you are required to pay for vehicle repairs before your insurance company pays the remaining amount of the cost.
Let’s say your car has $10,000 worth of damage and you have a $500 deductible. In this case, you pay $500 and your insurance company covers the remaining $9,500.
You pay deductibles when dealing with collision and comprehensive coverage. Collision coverage covers the cost of repairing your vehicle after hitting another vehicle, while comprehensive coverage covers non-accident-related damages like theft, vandalism, or hail damage.
A Lower Deductible Means a Higher Premium
Some drivers lower their deductibles to $250 or less. This works well if you ever need to make a claim. Instead of paying $500 or $1,000 for every claim, you pay just $250.
However, a lower deductible always comes with higher insurance premiums. Instead of paying, say, $100 per month for car insurance, you might pay $120 per month.
A Higher Deductible Means a Lower Premium
Similarly, drivers can ‘bet on themselves’ by raising their deductible as high as possible. You’ll pay lower premiums, but you’ll pay more if you ever get involved in an accident and need to make a claim.
Instead of paying, say, $100 per month for car insurance, you might pay $80 per month. If you get into an accident, however, then you’ll need to pay a $1,500 or $2,000 deductible.
Things to Consider When Setting your Deductible
Setting your collision deductible is a personal decision based on your desired exposure to risk and other factors. Some of the things to consider when setting your deductible include:
Can You Afford Your Deductible?
If money is tight or if you live paycheck to paycheck, then you may want to lower your collision deductible to make it more affordable. Otherwise, there’s no point in having car insurance. If you cannot afford to make a one-time payment of $1,000 or $1,500 towards your deductible, then you may wish to lower your deductible to a more manageable amount. Yes, raising your deductible lowers your monthly insurance premiums, but those savings are meaningless if you can’t afford your deductible.
How Much is Your Vehicle Worth?
The value of your vehicle plays a crucial role in the size of your collision deductible. If your vehicle is more than ten years old, for example, then it may not make sense to carry a large deductible, as the cost of repairing the vehicle may only be a few thousand dollars more than the deductible itself.
A newer, more expensive vehicle, meanwhile, will typically cost more to insure than an older vehicle. Having a higher deductible on a newer vehicle can lower insurance premiums.
What Are Your Chances of Getting Into an Accident?
Raising your collision deductible makes sense if you never get into an accident or make a claim. Obviously, nobody can 100% predict the future. However, some people have significantly lower chances of getting into an accident than others.
Some people don’t drive during rush hour, for example. Others work from home or avoid driving during the winter. Some people are extremely safe and cautious drivers. Based on your perceived risk factors, you may want to raise or lower your deductible.
What Are Your Chances of Making a Claim?
Even if you never get into an accident, you might still make a car insurance claim for other damages. Let’s say your car is parked at the mall and gets damaged by hail, for example. Here, your comprehensive deductible, not your collision deductible, will come into play. Comprehensive coverage will cover the cost of repairing the hail damage. You may also need to make a comprehensive claim if your car is stolen or vandalized, among other incidents.
What are the chances of making an insurance claim? Do you live in a high traffic area with lots of car accidents? Do you live in a rough neighborhood prone to car thefts? Do you park on the street? Or do you park your car in a locked, covered garage? Based on these risk factors and more, your chances of making a claim can change significantly.
A Higher Collision Deductible Means You’re Self-Insuring Smaller Claims
When you have a higher collision deductible, you’re effectively insuring yourself for smaller claims. A higher insurance deductible makes it less desirable to make a claim for smaller, less valuable damages.
Let’s say you smash the side of your car pulling into your garage. Your car has a huge scrape along the side, and it’s going to cost $1,450 to repair the scrape. Your insurance deductible, however, is $1,500. Your deductible is more than the cost of repairing the vehicle, which means your best option is to pay for repairs out of pocket.
Put simply, a higher deductible makes it much less desirable to make insurance claims for smaller damages.
Setting your collision deductible ultimately comes down to your own peace of mind and aversion to risk. Are you okay with accepting a higher amount of risk and a higher deductible? Or would you rather have the peace of mind of a lower, more affordable deductible?
Based on these factors and more, you can set your deductible to match your unique car insurance needs.