Auto Insurance Deductibles: Deciding Low Vs. High


Recently on Reddit, an auto insurance customer was concerned as to which deductible decision — low vs. high — was “the right one.”

“I just realized the price difference between a $500 vs. $1,000 deductibles on my collision coverage is $50 per 6 months,” he wrote. “It occurred to me the lower deductible is essentially gambling. I would be wagering $50 to win $450 that I cause an accident in the next 6 months. It seems like it goes against common sense to bet that I get into an accident. Assuming you have emergency savings to cover the higher deductible does it ever make sense to take the lower ones? Isn’t insurance supposed to be to protect against catastrophic failure? If $2,500 deductible wouldn’t ruin you then why not take it? Surely the insurance company has the house edge.”

As you know, automobile insurance deductibles greatly influence the monthly (or 6-month) premium that a customer ends up paying, and there is something to be said for both options. Before deciding which one best suits their situation, they will want to ask themselves the following questions.

What kind of a saver am I?

They’ll know the answer to this by examining their individual (or family) budget. Do they feel like large quantities of money are burning holes straight through their pockets? Are they given to frequent indulgences? Or do they take their discretionary income and set it back for a rainy day and the occasional indulgence? If they’re a good saver, then the higher deductible is probably the way to go. If they’re constantly trying to figure out “where did all the money go,” then the lower deductible and higher premium is a wiser option.

How stable is my income?

There have been times in my life when my income was strong and stable and others where it was paycheck-to-paycheck. During those paycheck-to-paycheck moments, I found having a higher premium and lower deductible suited me best because I knew that if there was an accident, I wouldn’t have to come up with a four-figure deductible before the insurance kicked in. Strong, stable income brings with it more confidence that $1,000 or $2,500 won’t break the bank. Of course, it still smarts when you have to pay it, but it’s also easier to build that cash back up because there is less of an ongoing payment. Still, that’s only true if — reverting to question one — the client is a good saver.

What other unexpected expenses could arise in the next year?

One can fix a budget that speaks to their specific situation, but even so, some expenses can’t be planned for. Healthcare costs, childcare expenses, funeral expenses — one must examine their lives and see which financial situations might arrive in the next 12 months that will need to be addressed. If there isn’t enough discretionary income to deal with an auto deductible and the most likely unexpected expenses, then it’s probably best to pay out the higher premium.

Am I taking on too much already?

Finally, auto insurance customers should consider the lifestyle changes they have made in the last several months. As an example, recently my wife and I bought a house. Our payment almost doubled, and we’re well aware that houses cost money for upkeep and repairs, so factoring in the housing allowance, new furniture, additional utility bills, etc., living expenses are more than doubling. Right now, the idea of taking a higher deductible to save a few bucks is unpleasant because I know how hard finding $1,000 or more would be in lieu of our other obligations. In the same vein, insurance customers need to be comfortable with what they’re taking on before sliding the deductible scale upward.

In Summary

Auto insurance deductibles definitely vary the amount you’re paying each month, but the low vs. high debate is best answered on an individual case-by-case basis. So if your clients should ask which path to follow, consider going over the above information and tell them to ask the questions presented here and answer them as honestly as they can before making a choice.

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