When you get car insurance, you’ll come into contact with all kinds of unfamiliar terms. One that can affect how much you pay in premiums and how much you can collect in a claim is deductible.

What Is a Deductible?

An auto insurance deductible is the money that you have to pay out of your own pocket before your car insurance company pays you anything. It prevents you from filing frivolous claims and ensures that you have a financial stake in any repair cost.

For example, assume you are involved in an accident that produces $2,000 worth of damage to your car. If you have a deductible of $250, you will need to take care of the $250 on your own. Your insurance company only pays $1,750 of your claim.

What Coverage Has Deductibles

Although available deductibles vary by policy limits, they are typically available in the amounts of $250, $500, $1,000, and $2,000. The average vehicle insurance deductible is $500 according to the Insurance Information Institute. Deductibles typically apply to the following types of car insurance coverages:

  • Collision takes care of damage when you hit something, such as another vehicle, no matter who is at fault. This type of coverage averages $300 per year in premiums. Although this insurance is not required by any state, your lender may require it if you want financing.
  • Comprehensive handles damage from incidents other than collisions, including vandalism or the forces of nature. The average cost per year is under $200. This coverage is another that is not required but may be demanded by your lender.
  • Personal Injury Protection, or PIP, is required by some states and pays for the medical bills of you and your passengers.
  • Uninsured Motorist Property Damage, which is required by some states, protects you if you are hit by a driver who either lacks insurance or does not have enough to cover the damage caused.

Liability coverage, which is required in nearly all states, handles compensation for injuries and property damage for other parties if you are at fault. This type of coverage does not require a deductible.

Optional coverages, such as rental car reimbursement or roadside assistance, also do not have deductibles.

When choosing a deductible, you must decide how much you are willing to pay out-of-pocket when you make a claim. You should a deductible that you can afford.

How Deductibles Affect Car Insurance Premiums

Larger deductibles reward you with lower premiums, so you can decide whether you want to pay more for better coverage or less for higher repair bills.

WalletHub reveals an example of how a larger deductible for collision affects premiums for a six-month term.

  • The minimum deductible of $100 produces a premium of $250.
  • $250 reduces the premium to $182.
  • $500 drops the premium to $129.
  • $1,000 lessens the premium to $89.
  • $2,000 lowers the premium to $84.

As you can see, increasing your deductible from $100 to $250 reduces your premium by 27 percent, and going from $250 to $500 lowers the premium by 29 percent. You get the biggest reduction of 31 percent when you increase the deductible from $500 to $1,000. However, going from $1,000 to $2,000 reduces your premium by only 6 percent.

One strategy in deciding on a deductible amount is to choose a high deductible and bank the premium savings from it, which you can then use for a claim. In this example, if you choose a $500 deductible, you’ll save $121 a month over choosing the minimum $100 option. After only five months, you will have saved enough to pay for all the $500 during a claim.

Diminishing Deductible

Some insurers have an option for a diminishing or vanishing deductible. The time you go without an accident reduces the amount you must pay for the deductible. Typically, your deductible gets a $100 credit for each year without an accident.

For example, if you have a $500 deductible for collision, and you go for four years without an accident, your deductible may drop by $400. If you normally have a $500 deductible when you file a claim, it would go down to only $100 after you subtract the $400. After you use this credit, some time must pass before you use it again.

When Do You Pay the Deductible

You generally have to pay your deductible with every claim whether no fault is assigned, such as when a tree falls on your car, when you and the other driver are equally at fault, or when the other driver caused the accident.

However, in many cases, if an insured driver causes the accident, his or her liability insurance will take care of fixing the damage to your car. You will not owe any deductible because your insurer is not footing the bill. Even if your company pays for the repair initially, they will get reimbursement from the insurer of the at-fault driver.

But, if your damage is greater than the policy limits of the other driver, you may use your own insurance as secondary coverage. You may then have to pay the deductible. You can then turn to civil court to try and recover your expenses.

If the other driver files a claim against you, the liability coverage of your policy will cover the repair, and you will not have to pay a deductible.

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