How Do Car Insurance Deductibles Work?
Deductibles are the amount of money you’ll pay out-of-pocket when you file a claim with your own insurance company.
They're typically a flat dollar amount, which you’ll be required to pay when filing a claim before any benefits are paid by the company.
The good news:
Deductibles work the same from one policy to another, and you'll be able to choose the amount for each.
How Do Car Insurance Deductibles Work?
Deductibles are a form of coinsurance, in which you share responsibility for a claim with the insurance company.
You can choose the amount of the deductible, which will usually be $250, $500, $1,000, or even $2,000 or more.
In most cases, the deductible will be applied annually.
Once you meet the deductible limit for the policy year, the insurance company will pay all costs, even on multiple accidents.
Here’s a high-altitude explanation of deductibles:
- The higher your deductible, the lower your car insurance premium will be. Since this means higher out-of-pocket expenses, higher deductibles mean higher financial risk to you in an accident.
- The lower your deductible, the higher your car insurance rate will be, but you’ll have lower out-of-pocket expenses. Lower deductibles mean lower risk and more security.
- The parts of your policy that deductibles apply to are typically your comprehensive and collision coverages, not the liability provisions.
Deductibles may also apply with other parts of your car insurance. For example, if you have uninsured/underinsured motorist coverage or personal injury protection, those provisions may carry a deductible as well.
A brief explanation of the coverages that may have deductibles are as follows:
Collision coverage will pay for damage to your vehicle caused while your car is in motion. It includes a collision with anything other than an animal, and will pay benefits, regardless of who is at fault.
Comprehensive coverage entails damage sustained to your vehicle while it’s parked. This can include animal strikes, theft, vandalism, and damage from falling objects.
Personal injury protection (PIP)
PIP covers medical expenses, income loss, and funeral expenses after an accident, regardless of fault. It is a common provision of no-fault car insurance.
This coverage is needed in the event of damage from an accident caused by an at-fault driver who either has insufficient coverage or is completely uninsured.
When Do Car Insurance Deductibles Apply?
Fault in an accident matters when it comes to your deductible.
Depending on the damage, claims that you file for any accident involving a deductible will apply. That is, providing the damage done is covered on your policy and costs more than your deductible.
When you're at fault
Depending on your state of residence, any claims filed for an accident that’s determined to be your fault entirely, partially your fault, as well as theft, damage from natural disaster or vandalism, will require deductibles, as those events fall under your comprehensive and collision coverages.
Except in states with no-fault insurance laws, a claim for damages can be filed against the other party’s insurance company if that person is determined to be at fault. If that’s the case, your deductible will not apply.
When no one is at fault
If it’s determined no one is at fault, each car owner is responsible for their own deductible.
If the at-fault driver does not have insurance or sufficient insurance to cover the other driver's expenses, the no-fault driver can use their own car insurance as secondary coverage to pay the costs, and their deductible will most likely apply.
With working example:
Let’s say your deductible is $500 and you’re involved in an accident that’s determined to be your fault. If the accident results in $4,000 in damage, you’ll pay the first $500 and your insurance will cover the remaining $3,500.
The easier part is that once your insurer approves your claim, they’ll typically issue a check to you subtracting the deductible instead of requiring payment from you.
For example, if your deductible is $250 and you have $3,000 in damage, your insurance company will send you a check for $2,750.
When Car Insurance Deductibles Don't Apply?
If your deductible is $1,000 and the repairs to your car are only $800, you’ll have to pay for the repairs out-of-pocket.
A claim won’t need to be filed, but you may decide to file one, so the $800 paid will apply to your deductible for the year.
However, that strategy is best used early in the year, and the possibility of another claim exists.
There's no damage to your car
In the event you cause an accident but there’s no damage to your car, you won't pay a deductible.
Your liability coverage will take care of the injuries and property damage to the other driver. This is because there is no car insurance deductible on a liability claim.
You won't pay any out-of-pocket expenses for an at-fault accident in which your insurance covers up to your policy limits for damages and/or injuries to another driver or passenger.
Your car is damaged but you're not at-fault
If your car is damaged in an accident that is not your fault, filing a claim with the at-fault drivers' insurance will cover the damage to your vehicle.
You’ll only pay a deductible if you go through your own insurance company, but it will not apply if the claim is paid by the other party’s insurance.
Insurance companies may offer what's called a "disappearing deductible" program that sets your deductible at a certain amount for each violation- and claim-free policy period. After a set number of policy periods, you may have a $0 deductible for comprehensive or collision claims.
For example, a $500 deductible will disappear after five years if the deductible is lowered by $100 for each claim-free year.
It’s important to note that your deductible will reset to the original amount after a claim is filed.
How Car Insurance Deductibles Affect Premiums
Deductibles were created as a way for both policyholders and insurers to share the risk on the road.
Without them, drivers could get into as many accidents as they want with no out-of-pocket liability whatsoever.
Since a lower deductible means more coverage, higher rates on premiums will be required to balance out the extra protection.
A common mistake:
People choose higher deductibles just have lower premiums, which can lead to financial difficulties in the event of a major accident or claim.
For example, let’s say you choose a $2,000 deductible to save money on your premium. You get into an accident involving damages that exceed the deductible amount. But if you don’t have $2,000 available to cover the deductible portion of the damages, you’ll likely have to borrow the funds. And if that's not possible, you may be unable to repair your vehicle.
Choosing the Right Deductible for Your Policy
There is no right or wrong answer when it comes to choosing your deductible.
In fact, the best answer we can give you is this: choose what you’re comfortable paying.
Deductibles can start as low as $100, but the most common option is $500.
However, you can also choose $250, $1,000, or even as high as $2,500.
But whatever deductible you choose, be sure it’s an amount you can afford to cover if you’re involved in an accident that is your fault.
Consider your driving record
For example, if your time on the road involves spending a lot of time on busier roads or your driving record is no stranger to accidents, we suggest a lower deductible.
Lower deductibles will provide more coverage from your insurer, as in more money to cover any damages.
If you’re a safer driver or you have extra money put away and you want to pay less on your insurance rate, a higher deductible may be a better option.
A higher deductible may also be desirable if you drive a new car, since they’re more expensive to insure.
The higher deductible will lower the rate on your premium. If you're leasing your vehicle, you'll want to have a lower deductible in the event of even a minor accident.
Leasing companies will require that the car be returned in the same condition as it was when you first acquired it, and charge for any significant damage.
Having a higher deductible should not be used as a money-saving trick. If you’re not the most experienced driver or you're considered to be a higher-risk driver, having the extra security of a lower deductible could be your best option.
Shop and compare
Lastly, it’s okay to admit that car insurance may not be your strong suit.
There are plenty of companies with agents willing to guide you in the right direction to make sure that you get the right amount of coverage, including the best deductible amount.
You owe it to yourself to shop around and compare policies.
Never choose a company because they’re the cheapest.
Protection on the road should never be taken lightly and you may find that some companies will charge you hundreds or even thousands of dollars more for the same policy.
When Repairs Cost More than the Deductible
Insurers will only provide coverage if the repairs cost more than your deductible.
If the cost of repairs exceeds the amount of your deductible, you may still want to pay out-of-pocket to prevent adding a claim to your policy.
Any major damage that you cause to your car should be reported regardless of claims.
You can most likely get away with cosmetic damage, but if you repair damage on your own without reporting it and it causes issues later on, a claim for the new damage could be denied as the insurance company may judge the claim to be part of the original damage you fail to file for.
Avoid too many claims
You may also want to avoid filing a claim if you have multiple claims in the past, and the addition of a new one will cause your premiums to skyrocket.
For example, if your deductible is $1,000 and repairs will cost $1,200, it may be in your best interest to pay out-of-pocket.
Paying out-of-pocket also allows you to make the repairs on your own time, especially if money is tight and the repairs aren’t urgent. This will provide a wider window for repairs as well as keeping a claim off your policy.
When it comes to choosing a deductible, don’t cut corners.
There are other ways to save on your premium, like bundling and discounts.
Auto repair bills and medical bills tend to add up and you’ll want to make sure that you have enough coverage to prevent any out-of-pocket expenses.
Considering your own individual situation and driving history will help you choose the right deductible amount.