A car insurance deductible is the money you have to pay out of pocket before your insurance kicks in. It can affect your premium and your financial responsibility in the case of an accident. Not all insurance coverage requires a deductible. Understanding which ones do, and how deductibles work, is key to making smart choices about the coverage you need.
Key Points
• A car insurance deductible is the amount you pay before insurance covers damage.
• Higher deductibles result in lower premiums but a greater personal financial burden.
• Lower deductibles lead to higher premiums but less financial responsibility.
• Choose a deductible based on budget, risk tolerance, and vehicle value.
• Deductibles are paid when a claim is made, either to the repair shop or as a reduction in reimbursement.
What Is a Deductible & How Does It Work in a Claim?
It’s costly for insurers to process lots of small claims. For this reason, they charge a deductible in hopes of dissuading policyholders from making these claims. As a result, for certain types of car insurance coverage, you will need to take on the responsibility of paying a deductible.
The size of your deductible will affect the size of your premium. A clear understanding of what that means can help you with personal insurance planning, including how premiums fit into your financial plan.
Definition: Your Out-of-Pocket Share Before Insurance Pays
Your car insurance deductible is the amount of money your carrier requires you to pay before they’ll step in and pay the rest.
For example, say your collision coverage has a $500 deductible, and you’re in an accident where you are at fault. Your vehicle has $1,500 in damage. In this case, you will be responsible for covering the first $500. Your insurance carrier will then cover the remaining $1,000 to repair your vehicle.
Deductible vs. Premium Relationship Explained
In general, the higher your deductible, the lower your car insurance rate will be, and the higher your out-of-pocket expenses will be. Choosing a higher deductible may help you lower your car insurance costs each month.
On the other hand, the lower your deductible, the higher your monthly insurance rate, and the lower your out-of-pocket expense.
How Deductibles Affect Claim Payouts
Your deductible has a direct effect on your claims payout by determining how much you are expected to cover versus your insurance provider.
Which Coverages Have Deductibles?
Several coverage options typically have a car insurance deductible, including collision, comprehensive, uninsured motorist, and personal injury protection.
Collision coverage helps cover the cost of replacing or repairing your vehicle if you are in an accident in which you are at fault. This accident could be one in which you hit another car or a stationary object, such as a tree or a retaining wall.
Collision coverage is sometimes optional. If you finance your vehicle or you lease, your agreements may require that you have it. However, if you own your car outright, you may consider forgoing collision coverage, especially if your car is not very valuable.
Comprehensive insurance helps protect your car from events that aren’t an accident, such as fire, theft, vandalism, or acts of weather, like hail. These are all incidents that are essentially beyond your control. Comprehensive coverage is also not always mandatory, but lenders and leasing companies may require that you carry it.
Uninsured driver coverage helps cover the cost of repair or replacement in the event you are in an accident where you are not at fault and the other driver does not have enough insurance to cover these costs. Meanwhile, personal injury protection helps cover the cost of medical expenses and lost wages when you’re in an accident, regardless of who is at fault.
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Choosing Your Deductible: Balancing Cost and Risk
Choosing the right size deductible means striking a balance between your ability to cover the deductible, your risk tolerance, and the value of your car.
Here’s a closer look at the factors you’ll need to consider when choosing your deductible amount.
Cash Flow
Choosing a higher deductible is a good way to lower your monthly premiums, but you need to make sure that you have the cash on hand to pay the deductible should you need to.
You may have enough money coming in each month that cash flow isn’t a problem. But, if it might be, consider establishing an emergency fund to help you cover unexpected expenses like this. Conventional wisdom suggests building up an emergency fund equal to three to six months’ worth of expenses.
Risk Tolerance
The reason higher deductibles lower your premiums is that you are shouldering more of the risk in case of an accident. As a result, insurers are typically more willing to give you a discounted rate. However, you have to be comfortable taking on that risk. If you’re not, a lower deductible may be right for you.
How Likely You Are to File a Claim
Generally speaking, the more likely you are to file a claim, the more you may benefit from a lower deductible. If you are unlikely to file a claim, you may have greater savings with a higher deductible. So, consider your accident history or whether you engage in high-risk driving behaviors — such as speeding — when making your choice.
Value of and Condition of Your Vehicle
Consider the value of your car when choosing a deductible. The more your car is worth, the more it might make sense to have a higher deductible.
Paying Your Deductible: When and How
You’ll typically pay your insurance deductible once your claim is approved. The method of payment can vary. In some cases, your provider will pay repair shops directly. In this case, you’ll need to make a payment for your deductible to the repair shop as well, and your insurer will cut them a check for the rest.
If you’ve already paid for the repair, you may make a claim for reimbursement, in which case your insurer will send you a check for the amount of the repair minus your deductible.
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When Deductibles Don’t Apply
In general, you won’t have to pay a deductible if you are not at fault. In this case, the other driver’s liability insurance should kick in and pay for the cost of repair or replacement.
There are certain other situations in which you may not owe a deductible as well. For example, if you have glass coverage, you may not owe a deductible if you need to replace a windshield. You may check with your insurance representative to find out which deductible applies and when, or take a look at your car insurance declaration page.
The Takeaway
In the end, choosing the right auto insurance deductible comes down to understanding your personal budget, driving habits, and risk tolerance. Whether you choose to prioritize lower monthly payments or peace of mind should you need to make a claim, the key is making an informed decision that fits your unique situation.
When you’re ready to shop for auto insurance, SoFi can help. Our online auto insurance comparison tool lets you see quotes from a network of top insurance providers within minutes, saving you time and hassle.
FAQ
Do I pay my deductible directly to the repair shop?
Yes, in some cases you’ll pay your deductible directly to the shop that repairs your car, and your insurance company will cut them a check for the rest.
Should I choose a $500 or $1,000 deductible?
The size of the deductible you choose will depend on a variety of factors, such as your ability to cover a higher deductible, whether you’re looking to lower your monthly premiums, your comfort in taking on additional risk, the value of your car, and your driving record.
Does liability insurance have a deductible?
Liability insurance covers the damage you cause to another person’s vehicle in an accident in which you are at fault. Liability coverage does not have a deductible.
What happens if damage costs less than my deductible?
If the damage to your car costs less than your deductible, you are on the hook for covering the full cost of repair. Typically, your insurance won’t cover anything.
Can I change my car insurance deductible anytime?
You can usually change your deductible amount at any time, not just when you renew. The policy change will typically take effect at the start of the next policy period. Contact your insurer directly to make a change.
photo credit: iStock/David Gyung
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SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Auto Insurance: Must have a valid driver’s license. Not available in all states.
Home and Renters Insurance: Insurance not available in all states.
Experian is a registered trademark of Experian.
SoFi Insurance Agency, LLC. (“”SoFi””) is compensated by Experian for each customer who purchases a policy through the SoFi-Experian partnership.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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