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How to choose the right car insurance deductible

Tamara E. Holmes

Car insurance is all about risk. The more likely you are to file an insurance claim, the more you’ll pay in insurance premiums. But you can share some of that risk with your auto insurer – and bring your car insurance rates down – by adjusting the deductible on your insurance policy.

The deductible is the amount of money you agree to pay out of pocket before the insurance company will put up money for your claim. If you have a $500 deductible, that means you’ll pay the first $500 of any claim you file and the insurance company will pay the rest.

According to comScore Inc.’s 2012 Online Auto Insurance Shopping Report, low deductibles are the second-most important feature of car insurance coverage; safe driver discounts are the top feature. However, low deductibles aren’t as big of a factor as they’ve been in the past. The same study found that 56 percent of car insurance policyholders cited a low deductible as being the most important feature in 2008, compared with 47 percent in 2012.

Typical auto insurance deductibles are $200, $500 and $1,000, says Loretta Worters, a spokeswoman for the Insurance Information Institute. Zero-deductible policies are rare but not unheard of. For example, Nationwide’s Vanishing Deductible lets you earn $100 off your deductible for every year that you haven’t had accidents or traffic violations. Through the program, a consistently good driving record can lead to complete elimination of your deductible.

Factors to consider

However, a car insurance policy with a low deductible isn’t always your best option. A number of factors should go into your decision about how much of a deductible to take on.

One of the greatest benefits of taking on a higher deductible is lower premium costs. For example, according to Worters, an increase in the deductible from $200 to $1,000 can lead to premium savings of 40 percent. If you’re looking for ways to save money on your monthly expenses, a higher deductible can pay off as long as you don’t need to file a claim.

During the recession, more Americans saved money on insurance by choosing higher deductibles, according to a study by Quality Planning, a company that measures insurance risk. The study found that between 2006 and 2009, the percentage of vehicles with insurance deductibles of more than $250 increased while those with deductibles less than $250 decreased.

Saving money is a great thing, but there’s another reason why you might want to take on a higher deductible, says John David, author of “Ten Questions: The Insider’s Guide to Saving Money on Auto Insurance.” The more insurance claims you file, the more likely your insurance premium will rise. By picking a higher deductible, you ensure that you pay out-of-pocket for small claims, which could keep your premiums lower in the long run.

It’s also important to note that a deductible can be too high. The savings you see by choosing a higher deductible won’t do you any good if you can’t afford to pay the deductible when you file a claim, Worters says. If you have little money in savings, a lower deductible would ensure you don’t have to scramble for cash in an emergency.

It also makes sense to consider your driving history, David says. If you’ve had a lot of fender-benders or you’re insuring younger, less experienced drivers, you might want to take on a lower deductible if you think you’ll be paying a lot of out-of-pocket repair costs. But if you have a good driving record with few claims, your risk of having an accident or filing a claim is relatively low, so it might make sense to assume the additional risk of the higher deducible.

Do the math

Before making your decision about how much of a deductible to take on, ask how much the premium would be with the deductible and without it, David says. If, for example, your premium would be $500 with a $1,000 deductible and $700 with a $500 deductible, you’ve got to decide whether the deductible is worth the additional $200. If you rarely file claims, keep in mind that if you go claim-free for five years in the previous example, you’d save enough on premiums to cover the $1,000 deductible.

You also should consider using the money that you save with a lower deductible to buy more liability coverage – which pays for damages done to others if you’re at fault in an accident. Forty-nine states, with New Hampshire being the lone exception, require a minimum amount of auto liability coverage.

When it comes to choosing a deductible, there’s no one answer that fits everyone’s circumstances. It really comes down to your financial situation and the level of risk you’re comfortable with, David says. “You have to look at the math,” he says.

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