Impact of Higher Deductibles on Auto Insurance Premiums

Auto insurance companies typically establish standard deductible amounts for the policies they provide. When policyholders or applicants opt for higher deductibles, insurers often lower the premiums they charge as this arrangement proves advantageous for them for various reasons. Many motorists do not make frequent claims, and some may have gone without making a claim for an extended period. In these scenarios, opting for higher deductibles can be a strategic approach to decreasing car insurance premiums. Essentially, by assuming a greater portion of the risk, policyholders enable their insurers to offer lower rates.

Why Car Insurers Offer Lower Rates for Higher Deductibles

Put simply, a deductible is the money you need to cover from your own pocket whenever you file a claim. In essence, it’s your portion of the costs, and the insurance company takes care of the rest. For instance, if your car sustains $1,000 worth of damage and your deductible is $500, you and your insurer will split the costs evenly.

Increased Risk Sharing: Once you increase your deductibles you accept to pay a larger portion of losses out of pocket. In a way, this has a coverage reducing effect. When motorists agree to such arrangements, they tend to be extra careful to avoid any damages to their automobiles as they will be sharing more of the repair costs with their insurers. This can lead to safer driving habits and more cautious behavior, which ultimately benefits the insurer as well.

Fewer Claims: Auto insurance companies are pleased to provide more attractive offers to drivers who opt for higher deductibles, primarily because they anticipate a decrease in the frequency of claims. This is supported by a couple of reasons. Firstly, when an individual chooses to raise their deductibles, it indicates a reluctance to file minor claims. Secondly, a greater number of damages will fall below the raised deductible threshold, naturally leading to a reduction in the overall number of claims.

For example, if you have just suffered a vehicle damage of $800 and your deductible was $500, you may be able to get $300 from your insurance. But if you have recently increased your deductible from $500 to $1,000, you won’t be able to make a claim as the damage is below deductible (your share). If you have the mindset of not making claims unless you suffer a substantial loss, you may not have made a claim in a situation where you will get only $300 anyway. Then, why not save on premiums by increasing the deductibles now.

The Advantages of Higher Deductibles for Policyholders

Usually, some people are risk averse and they typically prefer their deductibles as low as possible and won’t even entertain the idea of considering higher out of pocket payments. On the other hand, this is just a calculated risk for many people especially if they have a long clean driving record and they are currently low risk, meaning they don’t have a teenager on their policy or living in a high risk neighborhood.

Lower Premiums: The obvious benefit is getting cheaper automobile insurance rates in return for higher deductibles. If your chance of making a claim is low, you may want to pay as little as possible for your car insurance too. The good thing is that you can always get quotes to see how much you will save and this allows you to determine if it is worth taking more risks or not.

Let’s consider a scenario in which you save $142 a year by increasing your deductibles from $500 to $1,000. That means you will save money if you don’t make any claim for 3.5 years (500/142=3.5 years) and you will keep saving thereafter as long as you don’t make a claim. However, if you make two claims in that period, you would have to pay $1,000 extra in total ($500 each) and you would lose $500 in that deal.

Fewer Claims: Abstaining from filing claims ensures you maintain a low-risk profile, which in turn leads to even more reduced premiums. Elevating deductibles serves to curtail the likelihood of initiating minor claims, consequently diminishing the overall number of claims over time. Naturally, auto insurance providers have mechanisms in place to ensure that individuals who make frequent claims bear higher premium costs.

Insurability: When numerous claims are made within a brief timeframe, the consequences are twofold. You not only find yourself facing exorbitant vehicle insurance premiums but also run the risk of your current insurer opting not to renew your policy, with many other companies possibly declining to offer you a quote. This underscores the importance of shying away from minor claims, reserving claims exclusively for instances of significant loss. Such a strategic approach proves advantageous in the long haul. If you agree to this thinking, you probably wouldn’t mind having higher deductibles and premium savings would be the bonus you get.

Considerations for Raising Car Insurance Deductibles

Generally, Collision and Comprehensive coverage come with deductibles and they are also the most expensive portion of an auto insurance policy for most people. That is why motorists normally adjust the deductibles on these covers to reduce their premiums. Liability coverage normally doesn’t have any deductible.

Collision and Comprehensive can have different deductible amounts and often Collision coverage may have a higher deductible. Furthermore, typically increasing collision deductible saves more money and therefore, you may consider increasing only Collision deductible and leave Comprehensive deductible as it is if you are given the option.

Although Collision coverage usually costs more and therefore it may be favorable to increase its deductible in terms of premium savings, policyholders make statistically more Collision claims. So, there is more of a risk taking there hence the higher discounts. But you should keep in mind that the premium costs depend on the insurer, state and your circumstances.

Setting higher deductibles essentially reduces coverage, as you’ll receive a lesser payout in the event of a claim. Therefore, it’s imperative for policyholders to refrain from setting deductibles beyond their financial means, as this could strain their finances during critical times.

Even though responsible drivers typically stand to accrue savings in the long term by maintaining higher deductibles, the possibility of experiencing a challenging year with multiple claims can’t be dismissed. This potential scenario should be anticipated, with policyholders advised to have funds set aside for such emergencies in their savings accounts.