What Is A Deductible In Car Insurance?

As a result of the ongoing pandemic, our current situation has changed how we operate on a day-to-day basis. While many individuals have replaced their daily commute with laptops on the coffee table, cars are still necessary for most of us.

For a majority of drivers, creating an ideal insurance policy is a balancing act of coverage, budget, and fine print clauses. On top of everything else, you also need to consider what deductible works best for you. For some, it can be a bit overwhelming.

Let’s explain how deductibles work and how to choose the best one for your budget and coverage needs.

What Is A Deductible?

Simply put, a deductible is the amount of money you’ll have to contribute towards settling an insurance claim. It works the same way regardless of your level of coverage and is most commonly included in comprehensive and collision packages. 

To illustrate how the deductible is applied, let's assume your rate is $500. If you were involved in an accident that caused your vehicle $10,000 in damages, the insurance company would cover the $10,000 minus the deductible rate. You would essentially pay your $500 deductible, and the insurance company would cover the remaining $9500. 

Though this may sound like a sweet deal, the same approach applies to lower costs as well. This means that if the damage is $1000, the same deductible applies. So you’d have to cover half of the costs ($500) of that $1000 claim. Also, in a case where the damage is estimated to be $500 or less, the entire cost of repairs would fall on you.

When Is A Deductible Not Applicable?

Though rare, there are some exceptions where a deductible is non-applicable. For instance, if another insured driver is responsible for your damages and injuries, a deductible does not apply. In that event, their insurance company must reimburse you, but if you have collision damage, you may want to settle things more quickly through your insurance. In case of partial or shared responsibility, the deductible will be applied in part or entirely - dependent on various factors. Be sure to look at the details of your policy to find out about any clauses regarding a non-applicable deductible.

How To Select The Amount Of Your Deductible

Setting up an insurance policy requires you to consider several aspects of your financial status and personal driving habits. Both your premium and deductible correlate with one another, and as you increase the deductible, the premium decreases, and vice-versa. The amount you select for your deductible is a matter of personal preference, but the majority of drivers opt for the $500 to $1000 range for the sake of affordability.

Type Of Vehicle

The make and model of your vehicle play an important role in determining your deductible. For instance, older cars with low market value only need a minimal amount of coverage (outside of medical). This helps keep your deductible low, especially if you have finished paying off your vehicle loan and you own the car outright.

But for new car owners, the outlook may not be as rosy. The average cost of a new vehicle is estimated to be $37,000, which results in higher premiums. If you drive a new car and are involved in a major accident, it can cause thousands in damage (let alone the potential for personal injury) or total the vehicle. 

In this case, setting the deductible at $1000 will allow you to only have to contribute a small percentage of the total costs. A decrease in insurance premium would also allow you to make up the difference within a few months.

Reimbursement Threshold

Fortunately for all parties involved, low-speed crashes and fender benders are far more common than high-speed impacts. Modern vehicles are equipped with expensive and highly effective safety equipment in the front and rear bumper. So while it may seem like nothing from a cosmetic standpoint, a trivial fender-bender could cause considerable damage. For drivers with a high deductible, the majority of the repair costs would fall on them. 

Stacking Deductible

Before signing on the dotted line for your policy, you should verify how each scenario is treated. The reason is that multiple insurance packages may have separate deductibles, which are cumulative. This is known as a “stacking deductible,” and the best way to portray how this works is through an example:

Let’s say you were driving a car with three other passengers and got hit by an uninsured driver. You have uninsured driver and passenger coverage, so everything is covered. However, your deductible is set at $1000, and the contract states it is applied separately. This means you’d have to contribute toward car repairs and the medical bills of each and every passenger. For this reason, always make sure your deductible is bundled in as many clauses as possible to avoid situations of this nature.

Driving Habits

Both distance and your driving frequency are essential in deciding what insurance policy is best for you. Understandably, the likelihood of being involved in an incident rises the more time you spend behind the wheel. So the more you drive, the lower the deductible should be to help ensure minimal losses in the event of an accident. 

However, if you’re only putting in a few thousand miles per year, selecting a higher deductible can save you money on your premium costs, and this difference may be able to help contribute if an accident does ever occur.

Summary

Essentially, a deductible is a way for the driver to share the financial responsibility of an accident with the insurance company. While a deductible may not apply if you were not the driver at fault, it doesn’t necessarily protect you in cases where the responsible driver is underinsured or uninsured.

The decision you make on your deductible price should be a matter of personal preference. The cost of an insurance premium scales with the deductible, so finding the balance comes down to assessing your budget and risks of having an accident. For most drivers, a $500 deductible provides the best balance of security and cost of the premium. 

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