How do I decide what my car insurance deductible should be?

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How do I decide what my car insurance deductible should be?

If you’ve ever purchased an automobile insurance policy, you’re probably familiar with the question “and what would you like your deductible to be?”

Personally, I want a $0 deductible, but no one seems to offer that. In fact, most auto insurance policies come with deductibles that range from $500 to $2,000 (though some policies offer deductibles as low as $250). While there’s no right or wrong answer when it comes to choosing your deductible, there are some general rules you’ll want to consider following in order to select the amount that’s right for you.

Finding that sweet spot

“When choosing your deductible, think about how much you’re willing to pay out of pocket if you need to make a claim,” Loretta Worters, the vice president of communications for the Insurance Information Institute, said. “Weigh that against the fact that higher deductibles generally mean lower premiums.”

And while you may be tempted to just go with whatever saves you the most money each month, that may not be your best option. So how do you choose?

“It really comes down to what you can afford,” Worters said.

Things to consider

You can start to determine what option is best for you by asking your agent to run the numbers for the highest and lowest deductibles available and compare the monthly premiums. If you’re looking for coverage online, you’ll need to reset the deductible levels and re-run the numbers, perhaps a few times, to find the monthly premium that best fits your budget. Keep in mind, though, that while you may get a great deal on a low monthly premium, you’ll also want to consider just how much you can afford to pay out of pocket should you have an accident.

There’s no easy way to assess exactly the right premium and deductible, but considering your driving record and personal tendencies can help. Are you easily distracted while driving? Do you tend to back into stationary objects like poles or trees? Have you clipped a few parked vehicles while trying to pull into a parking space? Do you drive a lot of miles, particularly on busy highways and interstates? Do you park your car in areas where it could be broken into?

If you answered yes to any of these, you may want to consider a lower deductible and higher premium. Deductibles for auto insurance aren’t like those for health insurance. You don’t hit an annual out-of-pocket amount and that’s it for the year. You pay your deductible for each qualifying incident, no matter how many there are.

As an example, let’s say you back into a dumpster in January and smash up your bumper. If your deductible is $2,000 and the cost to repair the damage is $2,100, you’ll pay $2,000 and your insurance company will cover the remaining $100 (Side note: In a case such as this, you may be better off not filing a claim on your insurance, which could increase your premiums, but paying out-of-pocket instead.)

Now, let’s say six months later your car window gets smashed while you’re at the beach with friends and your stereo is stolen. Chances are, your costs in this case are not going to exceed your $2,000 deductible, so you’re going to be paying out of pocket yet again. In these cases, you’d have been much better off choosing the $500 deductible that cost you $25 more per month in premiums.

Keep in mind that your deductible amount is for uninsured motorist, comprehensive and collision coverages and you’ll need to select a specific deductible for each of these. There are no deductibles for liability insurance.

If, however, you don’t tend to hit things, including other vehicles, and you don’t drive a lot of miles or visit areas with higher crime rates, the higher deductibles could make sense for you.

If all of this feels a bit overwhelming, consider talking to an independent insurance agent or broker about what coverage options may be best given your driving history, your personal driving habits and your financial situation. They should be able to help you determine the coverages that best suit your needs. In the end, your auto insurance coverage should give you a sense of security that you’re going to be covered regardless of the situation.

Image: RostislavSedlacek