It may appear to be inconsequential or even a given figure at times but vehicle insurers put deductibles in policies mainly to control small claims. Some people like to keep them as low as possible and some may have to go low due to financial strains. Other motorists realize the close relationship between deductibles and auto insurance premiums and keep them higher to reduce the costs today.
Deductible is the amount you have to pay out of pocket each time you have a claim. So, the initial part is covered by the policyholder and the rest by the insurer. You can have it high or low and these choices are reflected on premiums.
In most cases, policyholders are able to choose them especially when they want to increase them. Generally, you cannot go lower than the predetermined amount set out in a quote. Usually, the Liability component comes with no deductible and Collision, Comprehensive and Gap (for loans and leases) typically come with it, although each may be different. In some cases, Personal Injury Protection and Uninsured Motorist Coverage may have it as well, depending on the state rules.
They are great tools available to both companies and policyholders. Underwriters make sure that they reduce the number of small claims substantially by setting them up as a barrier. Most traffic incidents are scratches, bumps and knocks that can be paid out of pocket. Yet, carriers want to avoid them for two reasons.
They may be negligible as one but thousands of them add up to a large amount. Secondly, they like to save on administration costs of dealing with them. And the way of doing so is setting up higher car insurance policy deductibles so that people choose to deal with them on their own. It may seem like a sneaky thing to do but premiums would have been much higher if there wasn’t such mechanizm to take these small losses out of the system.
Policyholders can choose to search for lower out of pocket payments or deliberately increase them so that they can reduce premiums. When they push them up, they commit to increase the claim barrier. That is why most carriers are happy to return the favor with lower rates. Hopefully, the balancing act we are trying to emphasize here is making sense so far.
If you have full coverage and you crashed the automobile onto a lamppost, Collision component kicks in. For example, if the damage to the insured automobile is $4,000 and you have $500 collision deductible, you pay the first $500 of the repairs and the carrier settles the remaining $3,500. Regardless of the size of losses you cough up $500. If it was only some scratches and damages were $450, there is nothing left to compensate for and the case is closed, even before it is opened. So, you may choose not to bother the agent on this occasion.
Here are some of the possible deductible levels for various components of a policy.
Collision Coverage Deductibles: Almost all vehicle insurance policies include around $300 lower limit for this. If any damage comes to the insured automobile due to a crash the owner covers the set amount.
Comprehensive Coverage Deductibles: There are many perils included in this portion of a full policy. Usually, a similar amount to collision is set for comprehensive perils as well, although it may be lower in some packages.
For example, the Comprehensive component handles vehicle theft too. If the auto is stolen you will need to pay your share. If it is not found, you will get its cash value minus your agreed share so that you can buy a similar automobile to replace it. If it is found and there are some damages to it, you will pay the share again and the rest of the repair costs will be settled as usual.
Windscreen Repair or Replacement Settlements: Comprehensive component compensates glass works. Generally, windscreen has either very low or no out of pocket figure as most companies separate them from other Comprehensive perils.
How Deductibles Affect Premiums
Depending on the level chosen the premium can be substantially reduced. The higher amount means that policyholders will have to pay for most small damages out of pocket and therefore auto insurers reward them handsomely. For example, if you increase the amount from $250 to $1000 this may actually cut the premium for the related portion of a policy to half with many companies.
But people need to keep in mind that they need to pay extra $750 for each and every qualifying claim if they go for the $1000 option. If you are a good driver who hasn’t had accidents for so many years you may like to reduce the premium now and keep the money in the pocket. On the contrary, bad drivers may not find this option very appealing.
Of course, having a clean record for so long doesn’t mean that you won’t have several unfortunate incidents in a very short space of time. When you choose a larger amount, you take this risk so it may be prudent to keep some money aside, just in case.
Car insurance quotes are based on risks. By increasing your share of the risk as explained above, you would be reducing some of the burden off the vehicle insurer and therefore you should pay lower prices. It would be great if you could have them both. However, it may mean too high costs and you may need to play around to see what option gives you the best value.