By Taylor J. Kovar
–Hey Taylor – I’m switching up providers for my car insurance and wanted to ask about the deductible. I’ve always had a high deductible to try to lower the premiums, but is that the best way to go? Are there hidden benefits to having a lower deductible?
–Hey Greg – This is a good question with a lousy answer: it depends. Insurers are able to offer both high and low deductibles because different coverage options work for different people. The way to think about what will work best for you is to consider your finances now and then predict your needs for the future.
–1. Monthly cost. As you know, lowering the deductible raises your monthly or bi-annual rates. Your insurance is effectively more expensive, but your provider has to foot more of the bill when something goes wrong. The very nature of insurance is to pay for something we hope to never use—from car to homeowners to life insurance. Therefore, the urge to pay a lower premium usually wins out for most people. Of course, if you can afford to pay a little more each month, that will soften the blow when a big expense comes along.
–2. Deductible use. It’s important to keep in mind that your insurance can cover a range of expenses. If a rock kicks up and cracks your windshield or you hit a pothole and pop a tire, these repairs can often be covered by insurance after you’ve met your deductible. Since a new windshield or a new tire doesn’t cost over $1,000, a higher deductible means those repairs are coming out of pocket. However, if your deductible was much lower, say $250, you could file a claim and have insurance pay for half the windshield. The big thing to remember is that, unlike medical insurance, you don’t have a yearly deductible. With cars, the deductible amount applies to every claim. Just because you crashed your car in June doesn’t mean everything is covered if you do it again in August.
–3. Your maintenance budget. So, is a higher deductible better because it lowers premiums? That depends on how good you are at maintaining a rainy-day fund. The high deductible is coming back to bite you if you don’t save up money to cover that cost when something goes wrong. If you opt for a lower premium, it’s your responsibility to save some money and be ready to pay the full $1,000 that your policy demands you cover. If your philosophy is, “I’ll pay lower premiums and never have car trouble,” you’re setting yourself up to fail.
The answer to your question depends on your Money Personality and spending habits. Will you save enough to cover a higher deductible, or are you better off paying a little more now so you don’t get blindsided later? Be honest with yourself and I’m sure you’ll make the right decision. Good luck, Greg!
