UPDATED: Mar 13, 2020
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You’ve been in an accident – but you’re not sure whether you want to make an insurance claim. Should you pay for your claim out of pocket and avoid your insurance company entirely? Or is this a bad idea doomed to cost you more money in the long run? Today, we’re explaining everything you need to know about paying out of pocket versus going through your insurance company.
Yes, It’s Sometimes in your Best Interests to Pay a Claim Out of Pocket
To start, let’s make one thing clear: it’s sometimes in your best financial interests to pay a claim out of pocket.
In many cases, if the collision is minor and didn’t involve any other people, then you have no real incentive to make an insurance claim.
Remember: you’ll need to pay a deductible on your insurance claim. If it’s going to cost $100 to repair the chips in your windshield and your deductible is $500, then it’s not worth it to make an insurance claim.
Talk to your Insurance Company About Whether You Should Make a Claim
Your insurance company can help you decide whether you should pay out of pocket or make a claim. Some drivers hesitate to tell their insurance company about every incident – say, a minor collision. However, your insurance company can help you decide how much repairs will cost and whether the cost of repairs will exceed your deductible.
The only time it’s a bad idea to talk to your insurance company is if you have a reason to deliberately hide information from them. If you’ve filed multiple at-fault claims before, for example, and you’re worried about your insurance policy getting canceled, then you might want to avoid reporting it to your insurance company.
Overall, it’s important to ask several questions before you pay for a claim out of pocket.
Questions to Ask Before Paying for a Claim Out of Pocket
If you’re debating whether or not to pay a claim out of pocket, then it’s crucial that you ask yourself several questions, including:
Were Any Other Vehicles or People Involved?
It’s perfectly fine – even normal – to take care of single car accidents out of pocket. With a single vehicle collision, the repair costs are usually the lowest. Plus, reporting the accident might cause your rates to be higher for 3 or 5 years.
Let’s say you accidentally scraped the side of your car against your garage, and the cost of repairing the scratch is less than the cost of your deductible. In this case, you might want to avoid reporting the incident to your insurance company.
However, you may be legally required to report the incident if another driver was involved. Most states require you to report all incidents that result in more than $1,000 in damages, for example.
In general, it’s a bad idea to pay out of pocket for any claim involving another driver, people, or property. There are too many things that can go wrong – even if the other driver is honest. Things can get even worse if the other driver is dishonest. Full medical and repair costs might not be revealed for weeks after the accident.
Have You Filed an At-Fault Claim in the Last 3 to 5 Years?
Insurance companies will typically raise rates after a single at-fault claim. Your rates will stay high for 3 to 5 years. However, if you file multiple at-fault claims over a 3 to 5 year period, then your insurance rates could become prohibitively expensive. In some cases – say, if this is your fourth or fifth at-fault claim – your insurance company could even cancel your policy.
If you’ve recently filed an at-fault claim, then you might wish to pay out of pocket even if the cost of repairs exceeds your deductible. Repairs might cost $1,000, for example, and you might pay a $500 deductible. However, your insurance rates will be higher for 3 to 5 years, and the long-term effect will cost you more than $500.
Ultimately, if reporting a collision is going to make you a high-risk driver in the eyes of your insurance company, then you might want to pay out of pocket.
Does the Cost of Repairs Exceed your Deductible?
In general, you should consider paying out of pocket any time the cost of repairs is less than your deductible. If your deductible is $500 and the repairs are $250, for example, then you should probably avoid making a claim – that part is obvious.
However, it may be in your best interest to pay out of pocket when the repairs exceed the cost of your deductible. In some situations, it’s in your best interests to pay out of pocket if the repairs are within $500 to $1,000 of your deductible.
The reason is related to your higher insurance rates. If you’re going to pay $50 more per month for car insurance for 3 years (36 months), then you need to take that cost into account along with the upfront cost of repairs.
Do You Have an Emergency Fund?
If you have an emergency fund, and the incident was minor, then you may not need to dip into your insurance to cover the costs of the incident. Use your emergency funds and save yourself the hassle – even if your repairs are slightly more expensive than your deductible.
Yes, sometimes it’s worth it to pay out of pocket instead of filing an insurance claim. For any claims involving other people or other vehicles, it’s generally a bad idea out of pocket. However, for single vehicle claims and minor damage, it’s often in your financial interest to pay out of pocket.