Most states require motorists to have at least a minimum amount of insurance coverage, as set by each state before vehicles can legally be on the road. But depending on where you live, insurance is not mandatory. New Hampshire, for example, does not require insurance for drivers with a clean record (e.g. no automobile-related misconducts such as impaired driving). In Virginia, a spotless driving record means drivers can opt to register as uninsured motorists for an annual fee that is considerably less than auto insurance.
In the meantime, the rest of America begrudgingly spends countless dollars on car insurance premiums every year. The rates fluctuate across each state, depending on age, location and other factors. For example. monthly payments in Alabama for drivers under age 25 is about $115, whereas active or former military members only pay $60 per month. Meanwhile, New Yorkers with no ‘at-fault’ accidents can pay as high as $118 with Progressive or $180 with State Farm.
The situation may seem dire, but the crucial question is what happens to uninsured drivers if a collision does occur? Having no auto insurance may seem to offer short-term savings because it’s one less bill to pay each month, but the costs of an accident could have disastrous financial consequences. For those who feel burdened with a large monthly payment, the protection will offer relief in the long run. Plus, there are a number of ways to save on auto insurance premiums, the easiest of which is by increasing your deductible.
What is an Insurance Deductible?
Before the topic of deductibles can be tackled, it is important to understand what car insurance is. First off, an auto insurance policy is made up of multiple parts: liability insurance, collision coverage and comprehensive coverage.
Liability insurance is the minimum requirement for most states as it includes coverage for bodily injury and property damage. This covers damages to another driver when you are at fault. Damage to your vehicle due to a collision with another vehicle or stationary object is covered under collision coverage. Comprehensive coverage, as suggested by its name, covers damage to your vehicle, regardless of the source (unless you are at fault); for example, damage incurred from a fallen tree, hailstorm, vandalism or theft.
Each state has its own minimum requirements as to the amount of coverage motorists must have. In California, for example, at least $15,000 needs to be allocated for bodily injury liability per person and $5,000 for property damage liability per accident.
In the event of an accident after an insurance claim has been filed, that is where deductibles come into play. A deductible is the amount of money the motorist pays out of pocket for expenses, much like the copay you disburse at the pharmacy.
For example, if a collision results in $2,500 in repairs and you have a $500 deductible as part of your policy, then you pay $500 (or 20 per cent of the cost) and your insurer pays $2,000. Alternatively, if repairs amounted to $400, then you would pay 100 per cent of the costs, since the damages incurred cost less than your deductible.
How to Choose the Right Car Insurance Deductible
Policies with higher deductibles have lower annual premiums, which means that the average motorist pays lower monthly fees in exchange for the risk involved with setting a high deductible.
Generally, there are no deductibles for liability insurance, so settling for minimal coverage means you won’t need to think about the benefits and risks associated with high and low deductibles. With collision coverage and comprehensive coverage, however, determining the right amount for you is vital.
According to the Insurance Information Institute, increasing a comprehensive and collision deductible from $200 to $500 could lower premiums by 15 to 30 per cent. Increasing it to $1,000 may offer savings as high as 40 per cent! However, without $1000 sitting in your bank account, signing up for a higher deductible is not recommended.
It is important to choose an amount within your means. Consider your earnings, your household finances, your personal or emergency savings and your available credit. You can set the amount of your car insurance deductible accordingly. The amount typically ranges in increments such as $250, $500 and $1,000.
Although a tight budget may tempt you to register for a high deductible policy, covering a four-figure repair may require a high interest personal loan or a cash advance on your credit card ─ these financing options will only perpetuate your debt cycle. In fact, the cost associated with borrowing may surpass the savings on your premium.
Some Things to Consider
There are a few other things to consider when assessing the risk associated with a high deductible policy. Although in a time of need, insurance coverage may feel like a gift from the heavens, remember that insurance is a profit-oriented business. Lower deductibles mean you have purchased more risk protection, which in turn equates to greater profits for your insurer. Speaking with an insurance broker or auto insurance agent is advised, but remember to choose an amount that is reflective of your financial situation.
In the event of an accident, your insurance company will only move forward with compensation once you pay the deductible. Inability to procure funds in a timely fashion will only suspend the entire process.
You must also pay deductibles on a per-claim basis. So, over the course of a year, if you file four claims on your $1,000-deductible policy, but the costs were less than your deductible, you would be responsible for reparation in all four cases. Even if each claim resulted in only $500 in expenses, costs amount to $2,000 in total.
Consequently, if you often file claims, a low-deductible policy will be a more suitable option. On the other hand, drivers with clean records that practice safe driving (e.g. winter tires) and haven’t filed a claim in several years should consider paying higher deductibles.
The burden of high deductible policies can be alleviated in two ways. If an accident investigation is launched and the other driver is found to be at fault, your insurer will try to retrieve the funds (including the deductible you paid) that have already been paid out for reparation. This process is called subrogation. If your insurer is reimbursed by the insurance company of the driver at fault, there is a possibility of securing your deductible.
Secondly, certain credit cards offer auto insurance on rental cars. If you are using your personal car insurance instead of purchasing coverage from the rental company, your credit card provider may reimburse any money spent on deductibles should an accident occur.
Despite high car insurance premiums in some states, the coverage is much needed for auto owners. But there is no need to pay more than you need to every month. Practice safe driving, keep your record clean and choose coverage that is adequate for your needs. The first two parts of this action plan alone are enough to reduce your premium. Add a high deductible to increase your savings, but consider the risks and choose wisely.
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