When it comes to car insurance, a deductible is the amount you’d have to pay out of pocket after a covered loss before your insurance coverage kicks in. Car insurance deductibles work differently than medical insurance deductibles — with car insurance, not all types of coverage require a deductible. Liability insurance doesn’t require a deductible, but comprehensive and collision coverage usually do.
When you’re adding that coverage to your car insurance policy, you’ll usually have the chance to decide where you want to set the deductible.
Typically, the higher you set your deductible, the lower your monthly insurance premiums will be — but you don’t want to set it so high that you wouldn’t be able to actually pay that amount if needed. Here’s a quick primer how car insurance deductibles actually work, and how to decide what your deductible should be.
What does a car insurance deductible mean?
A deductible is the amount of money you have to pay out of pocket before your car insurance will cover the rest. For example, if you backed your car into a telephone pole, your collision insurance would pay for the cost of the damage. But let’s say your collision coverage had a deductible of $500. If the total cost of repairs comes to $1800, your insurance will only pay for $1300.
You can find your deductible amounts is listed on your declarations page.
Having to pay a deductible means you can do a sort of cost-benefit analysis before you make a claim with your insurer. If you’ve been in a small accident in which you were the only driver involved, it will make sense to pay out of pocket if the cost to repair the damage is less than or equal to your deductible.
What kind of coverage requires a deductible?
Not all types of car insurance coverage require a deductible. Liability insurance, which covers the costs if you damage someone’s property or injure someone with your car, never requires a deductible.
Liability coverage is the backbone of most car insurance policies, and in most states in the U.S., you’re required by law to have it. Other types of insurance coverage, like personal injury protection (PIP), which helps cover medical bills for you and your passengers and is required in some states, can have a deductible depending on where you live.
So can uninsured/underinsured motorist property damage coverage, which covers damage to your vehicle if you’re in an accident caused by a driver who doesn’t have insurance, or whose insurance can’t cover the full amount of damage they caused.
But comprehensive and collision insurance nearly always require a deductible, usually of $500 or $1,000. Comprehensive coverage covers damage to your vehicle that happens when it’s not being driven, like damage from fire, falling objects, vandalism and extreme weather, as well as collision with an animal. Collision insurance covers damage to your car from an accident, no matter who was at fault.
Both collision and comp coverage usually require that you pay an out-of-pocket deductible — but you choose the amount, and where you set your deductible will have an affect on your monthly insurance premium.
How do I decide what my deductible should be?
Generally, the higher you set your deductible, the lower your monthly premiums. That’s because you’re assuming more of the cost, rather than putting it on your insurer. The opposite is also true, choosing a low deductible means you’ll have to pay a higher premium.
You may be tempted to choose a high deductible in order to get a lower insurance premium, but remember, there’s a very real possibility you’ll have to pay that deductible someday. When choosing a deductible, make sure it’s an amount you’d actually have on hand if you needed to pay it.