Your car insurance deductible is the amount of money you’d contribute when your insurance company pays for a covered claim.
How do car insurance deductibles work?
Here’s an example: Your car slides through an icy intersection and crashes into another driver. No one is injured, but the front of your Toyota pick-up is pretty messed up. You file an insurance claim under your collision coverage and get an estimate for the repairs for your car.
The car repairs will be $2,500, but your insurer tells you that you have to pay the $250 collision deductible. This is the amount of money you’re responsible to pay out-of-pocket. Your insurance company pays the $2,250 they owe and the repair shop will invoice you for your deductible.
It’s important to remember that a car insurance policy includes a cluster of different coverages, each of which would kick in under different circumstances. Some coverages have deductibles, and others don’t.
Anytime you’re in a car accident and there are damages to your car that would be covered under comprehensive or collision coverages, you’ll be responsible for paying the deductible under each of those coverages.
You can pick different deductibles within your auto insurance policy for both collision and comprehensive. If you have multiple cars on your auto insurance policy, you can also choose different deductibles for each car.
Types of coverage and their deductibles
There are various types of coverage within car insurance policies. You can select different coverage limits for all of them, as well as set deductibles, depending on which coverage it is. Why can’t you always pick your deductible? Because not all coverages have them… and some, like Personal Injury Protection, have them in some states, and not others.
Work with your insurance company to determine how to meet your coverage needs. And ask your insurance provider about any exclusions, or stuff that they don’t cover.
These coverages have deductibles:
Comprehensive coverage
Hail, fire, theft, vandalism—basically any damage that isn’t caused by a collision—falls under your comprehensive coverage. If you think these events are unlikely to happen, you can pick a higher comprehensive deductible and pay lower insurance premiums. Or you can skip comprehensive coverage altogether.
Collision coverage
If you’re in a car accident with another car or hit a tree or pole, you’d file a claim under your collision coverage. Collision insurance covers you regardless of if you are the at-fault driver.
Uninsured motorist coverage
When you’re hit by an uninsured motorist, it doesn’t matter if they’re at fault—it could be really tough to get them to pay for the accident’s expenses. If you find yourself stuck in this tricky position, uninsured motorist coverage pays for any related medical expenses and car repairs. In many states, a deductible is required for this coverage, or the state may set specific rules for insurance companies on when a deductible may apply.
And these coverages generally don’t have deductibles:
Property damage liability coverage
If you hit another person’s car, run into a storefront, or knock down your neighbor’s mailbox, property damage liability reimburses the cost of repairs, without a deductible
Bodily injury liability coverage
Bodily liability coverage pays the medical expenses of another driver or injured party if you are the at fault driver. No deductible is applied.
Personal injury protection
Personal injury protection, or PIP, coverage pays the medical expenses for you or any injured passengers after an accident. It kicks in (after your health insurance does) to help cover co-pays and health insurance deductibles. PIP also offers reimbursement for lost wages. (FYI: While many states don’t have a deductible for PIP, some do.)
Medical payments coverage
This coverage pays any medical expenses not covered by your health insurance.
How does my deductible amount impact my insurance premiums?
If you increase your car insurance deductibles, it increases the amount you are responsible to pay out-of-pocket in the future, and it lowers the amount of money that an insurer would have to pay out in a car accident. Because they aren’t on the hook for as much money, they have less risk. So they charge a lower car insurance premium.
In short, a higher deductible equals lower insurance premiums. A lower deductible equals higher insurance premiums.
An example would be an insurance policy with a $500 collision deductible. Let’s say you’re in a car accident and there’s $10,000 worth of damage to your car. This falls under collision coverage.
When selecting car insurance coverage, you picked the low deductible of $500. The insurer would now have to pay out $9,500.
But what if you picked a high deductible of $2,500? Then the insurer would only have to pay out $7,500. They have less risk, so you’ll pay a lower premium.
If you’re not in any accidents whatsoever, then having a high deductible (with a lower monthly premium) would work out for you in the end. But if you do end up in an expensive crash, you might end up wishing you’d gone with a lower deductible. If only it was possible to predict the future!
Picking the best deductible amount
The best deductible amount takes into account the types of coverage you need and your specific financial situation.
It’s tempting to focus on paying the lowest monthly premium and adjust your deductible to get there. This can be risky business
What if like in the example above, you picked a $2,500 deductible but didn’t have that cash on hand? When you file an insurance claim, you’ll be invoiced for your deductible. If you don’t have that $2,500 ready to pay out you could be stuck in a bind with a repair shop.