What Happens if I Increase the Deductible on my Car Insurance Policy?
It can be confusing to understand exactly how an auto insurance deductible works and what happens when you increase your deductible. That’s why we’ve put together a simple guide to auto insurance deductibles.
What is an Auto Insurance Deductible?
You may already be familiar with some of the components of an auto insurance policy, specifically:
- The premium, which is the price you pay for the policy
- The policy maximum or policy limits which is the maximum amount that the auto insurance company is obligated to pay whenever there’s a covered incident.
In this article, we’ll be focusing on the third component: the deductible.
The deductible of an auto insurance policy is the amount of money that you pay for an incident before the insurance company starts covering the costs.
Here’s a simple example of how a deductible works with auto insurance:
During an ice storm, Tom is driving and skids off the road and into a ditch. Fortunately, he doesn’t suffer any injuries, but the cost to repair his car is $5,000. Tom does have collision auto insurance with a deductible of $1,000 and a policy limit of $10,000.
Here’s how Tom’s deductible works with his auto insurance:
- Tom must first pay the value of his deductible toward the car repair costs. In other words, Tom pays the first $1,000 of the repair costs.
- There is still $4,000 in repair costs. Tom’s auto insurance company pays for the remaining $4,000.
Not All Auto Insurance Includes a Deductible
Keep in mind that only property damage auto insurance—collision insurance and comprehensive insurance—offer policy deductibles. Liability auto insurance never includes a deductible.
When You Need to Pay Your Auto Insurance Deductible in California
If you have collision or comprehensive auto insurance with a deductible, you need to pay the deductible only when you claim. However, you always need to pay the insurance premium for the policy to stay active.
If you’re involved in a collision, and you’re 0% at fault, then you won’t have to make a claim with your collision insurance company. However, California uses a “comparative negligence” rule when determining fault. This means that if you’re partially at fault for an accident, you will still need to pay the deductible toward your car’s repair costs.
Paying Your Insurance Deductible When You’re in an At-Fault Accident
As an example, Marcus is involved in a car accident in California and is 80% at fault. The total damage to his car is $10,000. Marcus has a collision insurance policy with a deductible of $1,000 and a policy maximum of $10,000.
How Marcus’s Deductible Works
- The other driver is 20% at fault for the accident. That means that the other driver’s liability insurance pays 20% ($2,000) for Marcus’s car repairs. This leaves $8,000 in repair costs.
- Marcus must now pay his deductible of $1,000 towards the rest of his car repair costs. This leaves $7,000 in repair costs.
- Marcus’s collision insurance company covers the remaining $7,000 in car repair costs.
What a Higher Deductible Means
If your auto insurance policy has a higher deductible, it means that you will be required to pay more upfront if you’re involved in an accident or other covered incident. It also means that you might file fewer claims with the auto insurance company.
For example, suppose your deductible amount is $1,500, and you’re involved in a minor accident that causes $1,000 in damage. In that case, there’s no point in contacting the auto insurance company because you would have to pay the full amount anyway. Between having fewer claims to process and your agreement to cover a larger share of the major accidents, it may not surprise you that auto insurance companies charge lower premiums for policies with higher deductibles.
Since a higher deductible means a lower premium, why doesn’t everyone go with a high deductible? There are a couple of reasons that you should consider before opting for a higher deductible.
What to Keep in Mind Before You Increase Your Deductible
A Higher Deductible Does Not Automatically Mean a Higher Policy Limit
Keep in mind that the policy limit of an auto insurance policy is the maximum amount that the insurance company will pay after you’ve paid your deductible. In other words, a higher deductible also decreases the total amount that the insurance company agrees to pay.
Let’s take a look at two examples.
Tonya is involved in a car accident and is 100% at fault. The damage to her car is $15,000. Tonya has a collision insurance policy with a deductible of $500 and a policy limit of $10,000.
How Tonya’s Deductible and Policy Maximum Work
- Tonya first pays her deductible of $500 toward her car repairs. That leaves $14,500 in repair costs.
- Tonya’s insurance company pays out $9,500, the policy maximum minus the deductible ($10,000 – $500). That leaves $5,000 in repair costs. Tonya needs to pay for the rest of the repair costs herself.
- Tonya pays a total of $5,500, and the insurance company pays $9,500.
Charlie is involved in a car accident and is 100% at fault. The damage to his car is also $15,000. Charlie has a collision insurance policy with a deductible of $1,000 and policy limits of $10,000.
How Charlie’s Deductible and Policy Maximum Work
- Charlie first needs to pay $1,000 for the car repairs, which is the value of his deductible. This leaves $14,000 in repair costs.
- Charlie’s insurance company pays out $9,000, the policy maximum minus the deductible ($10,000 – $1,000). That leaves $5,000 in repair costs. Charlie needs to cover these costs himself.
- Charlie must pay a total of $6,000, and the insurance company pays $9,000.
As you can see, increasing your policy deductible does not automatically bump up your policy maximum. If you want a higher maximum, you need to request that separately with your auto insurance company. You would likely need to pay a higher premium for a higher policy maximum.
A Higher Deductible Can Lead to Higher Surprise Expenses
The biggest downside to a higher deductible is that it leaves you on the hook for a potentially large surprise bill if you’re involved in an accident. Before you decide to increase your deductible, ask yourself: are you financially prepared to pay the full amount of the deductible for an emergency repair? If the answer is yes, you should consider increasing your auto insurance deductible and lowering your insurance premium.
Ask an Insurance Expert How You Can Increase Your Auto Insurance Deductible
The safest option is always to consult with an auto insurance expert about changing your policy deductible. At Cost-U-Less, we have experienced staff who can guide you through the best insurance options for you. Visit us online for a free quote, stop by one of our offices, or give us a call at (800) 390-4071.