All about deductibles

A deductible is the amount of money you must pay out of pocket in the event of a loss before the insurance company will step in and pay.  The most common deductible amounts are $500 and $1000, but most companies offer as high as $5000 or higher for homeowners policies.  We often get asked, “What deductible should I choose?”  That is a very difficult question for us to answer, simply because we usually do not know your entire financial situation.  As a general rule I suggest people purchase the highest deductible amount that they would be willing and able to pay in the event of a loss.

If you have very little savings and only one car that you rely on to drive to work every day, then I would suggest a very low deductible simply because if something happened to that car, you would need it fixed right away and you want to make sure you have enough money to cover your deductible.  On the other hand if you are financially well off, and have more cars in your household than drivers, I usually suggest a higher deductible.

In Auto Insurance it is common for your Comprehensive and Collision Coverage to be the two most expensive coverages you have.  However you can always lower your premium by raising your deductibles.  A higher deductible not only means you are paying more of the cost to repair/replace, but it also cuts down on the number of claims that are turned in, thus reducing the number of employees the insurance companies must hire to adjust all the claims.

While raising your deductibles will decrease your premium, it will not decrease by the same amount for everyone.  For the most part when you raise your deductible, the insurance company reduces your premium by a percentage.  Therefore, if you have a bad driving record, or teenage drivers on your policy  raising your deductibles can save large sums of money, whereas a older couple with clean driving records it may not save much money at all.

It is also very important to take into consideration the value of your vehicle when choosing your deductible.  There are many theories out there as to when you should drop comprehensive and collision coverage, but in reality it is a case by case basis.  I always look at what I call the “break even point.”  I take the current value of the car, and divide that by the cost of the comprehensive and collision coverage combined.  This determines how long it will take you to pay for the value of the car through the premiums for comprehensive and collision coverage.  For example a 2007 Honda Accord on a customers account cost $523/year just for the comprehensive and collision coverage with a $1000 deductible.  The current value of that car is about $10,750 in its current condition.  So if that car was totaled the insured would receive $10,750 – $1000(deductible) + sales tax = $10,335.  $10,335/$523 = 19.76 years is your “break even point” There is no way I would suggest removing this coverage.  However a customer with a 1995 Ford Explorer with the same $1000 deductibles on comprehensive and collision coverage is paying about $325/year and his car is worth about $1900 in its current condition, so using the same math as before this vehicle’s “break even point” is only 2.77 years.  This means that if you can drive for 3 years and not have a claim then you came out better financially by not having that coverage even if you total it at the end of that 3 years.

This brings me back to one of my original points, if the customer relies on that car for transportation, and does not believe they could come up with or are not willing to spend the amount of money needed to repair/replace that vehicle I would still suggest keeping that coverage, knowing that in the long run it does not make the most financial sense.

One last item to keep in mind when choosing deductibles is at what point would you turn a claim in.  Yes you buy insurance for when you have a loss, but the reality is that insurance is meant to protect you in losses that could be catastrophic, not necessarily for small fender benders or a small homeowners theft claim.  The problem is that if you turn in a claim, almost 100% of the time your rates will go up at the next renewal.  For example if you have a $500 deductible on your homeowners policy and your backpack gets stolen at the airport that has your $750 laptop in it, I would usually suggest not turning in the claim.  You will only get $250, and it is possible that your rate will increase by more than that over the next 5 years so in the long run it costed you more money to turn it that claim and get $250 then if you had just paid out of pocket.  If this is the case then you should try to save a little money and go to a higher deductible.  I have also heard customers say that they probably would not turn in a claim unless it was over $5000, so I would recommend the highest deductible offered, because there is no reason to buy a lower deductible if you are not going to turn in smaller claims.

The bottom line is there is no correct answer for choosing a deductible, it is a case by case decision.  It is often that the same customer on the same policy may have cars that should have the coverage with a low deductible, cars that have a high deductible, and a car that does not carry comprehensive and collision at all.  It is the insureds responsibility to know what their car is worth, what they are paying for comprehensive and collision coverage, and then sit down with your agent and determine what is the best route for you.


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