How high should my car insurance deductibles be?
How can I determine how high to set my collision and comprehensive coverage deductibles when buying car insurance?
Deciding how high (or low) to set your car insurance deductibles is a tough decision, and if you could look into a crystal ball to see whether you'll have any accidents or physical damage to your vehicle in the future, it would make the decision much easier.
Your car insurance policy has two possible deductibles, one for collision coverage and one for Other Than Collision (OTC) coverage. OTC coverage protects your vehicle against damage from hail, fire, theft, basically anything other than you crashing into something else (with the exception of animal collisions which is an OTC coverage).
What is a car insurance deductible?
A deductible is simply an amount of money that you are willing to pay out of your pocket before your car insurance company pays a claim. The purpose of a deductible is to lower your car insurance rates, and also reduce small claims that would cause your rates to increase. By having to pay the first $250 or $500 of a covered claim, this reduces the likelihood of people filing small or even false claims and helps keep all our car insurance rates lower.
For example, if your car sustains $3,000 in damage in a hail storm and you carry OTC coverage on your car with a $500 deductible, you would pay $500 and your insurance company would pay the remaining $2,500.
Car insurance companies offer different levels of deductibles, which could start as low as zero dollars, but more commonly starts at $100 or even $250. The higher your choice of deductible, the lower the cost will be for that particular coverage. If you choose $1,000 deductibles rather than $250 deductibles, you are willing to shoulder much more of the cost of a claim, and your insurance company rewards you by giving you a much lower rate for your collision and OTC coverages.
How high should car insurance deductibles be?
This is purely a personal decision based on your financial situation. If you have savings set aside that you could use in the even of an accident or claim, you may be better off choosing a higher deductible and pocketing the savings on your car insurance premiums. On the other hand, if you don't have any savings you can rely on to pay a higher deductible, you may be forced to choose a lower deductible and pay the higher monthly car insurance rates.
This is where it would be really nice to have that crystal ball! If you could determine that over the next five years, you would have two OTC claims and one small fender bender, then you could do the math and determine the deductible that would result in the maximum savings for you.
Unfortunately, we have no way of knowing how many claims we'll have down the road, so we need to look at our personal situation and try to determine the optimum deductible. Are you a good driver or do you have an occasional whoopsy parking your car? Do you live in an urban area with a higher likelihood of your car being stolen? Do you have younger drivers on your policy who may be inexperienced and have an increased possibility of having an accident?
These are the types of questions you need to ask when determining how high your car insurance deductibles should be. Hopefully you can arrive at the magic number that will save you the most money over time.
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