• How Car Insurance Deductibles are Calculated

    Car insurance deductibles are one of the most important determining factors when it comes to the overall cost of an auto insurance policy. The way an auto insurance deductible works is simple. The deductible is simply the amount you must pay before the insurance coverage comes into force. For example, let’s just say that a car owner is involved in an accident that has a total cost of $5,000. If the driver has a deductible of $500, then he or she is responsible for the first $500 of the repair cost for the vehicle. Once the initial $500 is paid, the insurance company now pays the remaining $4,500 balance of the repair bill. The reason that car insurance companies add a deductible to their policies is because it helps them to reduce their costs and avoid frivolous claims. It functions very similar to a co-pay on a health insurance plan, which is something more people are familiar with. By using a co-pay on their health insurance policies, health insurance providers add an out-of-pocket expense to each visit to the doctor which helps deter customers from making appointments for trivial problems. In the same way, a deductible on an auto insurance policy keeps customers from filing a claim every time they scratch their car.

    The biggest factor in deciding the deductible amount for any specific car insurance policy is the consumer’s preference. Because the deductible amount is such a big deciding factor in the total cost of each auto insurance policy, the insurer generally leaves it up to the customer to decide the amount they would like to be responsible for in case of a claim. Deductibles are usually offered in standardized amounts of $100, $250, $500 or $1,000. The amount of the policy’s premium is adjusted up or down in respect to the amount of the deductible. That’s because the higher the deductible, the fewer claims the insurance policy is potentially on the hook for. The most common deciding factors that consumers should take into account when deciding a deductible are:

    • How Much Money You Have Available – It’s important to consider how much money you have on demand in case of a claim. Choosing a deductible in an amount that you probably won’t have the ability to pay can be a big mistake. That means that you’ll probably have to borrow money to settle your claim, which can be a big hassle.
    • Your Personal Driving or Claims History – Depending on how many claims you have filed in the past few years, you may want to choose your deductible accordingly. If you have a very good driving history, you may save money over time by choosing a higher deductible since you rarely have mishaps. If you consider yourself more likely to file a claim, a lower deductible may be more convenient for you.
    • The Requirements of your Financing or Lease – Oftentimes lenders and leaseholders put requirements on their customers establishing a maximum deductible on their policies. Make sure you review your financing contract or lease agreement to make sure you are correctly following their guidelines.
    • Local Laws – Many states have requirements that set a maximum deductible for liability insurance policies. Check with your insurance agent or state insurance controller to make sure you’re complying with local laws.