Nobody plans to be in an auto accident. Nobody plans to have their car stolen or vandalized. These unfortunate events can cause loss, damage, and even injuries. These and other events can lead to high-cost auto insurance. Unexpected circumstances can lead to unexpected expenses such as auto repairs, medical bills, or lost wages.
Problem is that adequate coverage can be expensive. Uninsured motorist, collision and comprehensive coverages, as well as accident benefits coverage, add up. To reduce your annual premiums, you might be tempted lower your coverage limits. You could consider raising your deductibles. We’ll show you how they work and why most people set them too low. We will also discuss the benefits of raising your own.
How Auto Insurance Deductibles Works
Your deductible is the amount that you will have to pay before your insurance company covers any expenses related to the claim. Let’s say you have $100 deductible for your collision coverage. You are on your way to work when you get into an accident that causes major damage to your car. The bad news is that your transmission needs to be replaced. It will cost $4,000.
You would need to only pay $100 for the repair bill. The rest ($3,900) would be paid by your insurer. Your deductible would have been $500. Your insurance company would pay the $3,500 balance.
You might feel grateful or even lucky that your policy has a low deductible. It may have been a bad financial decision.
Why a Higher Deductible Makes Sense
Your car insurance rates will go up if you have a lower deductible. Although you may not be able to notice the difference every month, the additional premiums will add up over time. Let’s go back to the previous example.
Collision coverage accounts for approximately 20% of your total auto insurance bill. This percentage can vary from insurer to insurer. A $100 deductible would result in $425 annually in premiums. Imagine that if you raise your deductible to $1,000, the collision portion of premiums will drop to $250. This will save you $175 per year.
It is unlikely that you will be in an accident. Even lower is the chance that your vehicle will sustain thousands of dollars worth of damage in an accident like this. To save $175 per year, you might consider raising your deductible from $500 to $1,000. You’ll save $875 over five years (other variables remain the same).
You’ll be paying $900 more if you have a $1,000 deductible. You’ll be ahead if you can prevent damage to your vehicle for more than five years. Each year, the $175 savings will add up.
There are other ways to save money on car insurance
You can reduce your rates by raising your deductibles. There are other options. Ask your auto insurance company if you are eligible for discounts. Retirees, drivers who have completed driver training courses, and those with alarm systems installed in their cars will often see a reduction in premiums. You may be eligible for discounts if you have multiple vehicles insured or bring your property insurance policy to one company.
Consider dropping collision and comprehensive coverages if your vehicle is older. They can make up as much as 40% of your total premiums. You could see a significant drop in your annual bills if you dropped both.
Compare quotes from different insurance companies every time you want to renew your policy. Despite the potential savings, most consumers don’t shop around. Stop settling for renewals.