In car insurance, a deductible is the amount the insured motorist agrees to pay for a covered claim, while the insurance covers the balance of the cost up to the limit of the coverage. That’s the simple answer, but there’s much more to understanding auto insurance deductibles than just that.
Car insurance is one of the few products we pay for while at the same time hoping we never use it. Insurance is designed to enable us to lessen our risk of financial distress if something bad happens. Accidents, personal injury, natural disasters and theft can all happen. Since your car is a valuable asset, incidents that damage your car can be costly. Incidents that hurt other people can be even more costly.
In theory, you could forgo insurance with the idea that if an accident, theft or natural disaster happened to your car you would pay for the loss out of your own bank account, but most people choose to mitigate their risk by purchasing an insurance policy that “covers” them in the event of bad occurrences. Further, state laws typically require drivers to carry “liability” insurance that pays for the medical care of others injured by an accident they caused.
Here’s the very short course in the various facets of a typical auto insurance policy:
- First, there is collision coverage. This coverage helps pay for damage done to your car in an accident. That accident could be a collision with another car or a collision with an object like a tree, traffic sign, light pole or moose.
- Next, there is comprehensive coverage. This coverage helps pay for damage done to your car in something other than a collision. Of course, there a many ways your car could be damaged besides a collision. It could catch fire. A branch from a tree could fall on it. It could be stolen. It could be damaged in a natural disaster like a flood or a hurricane. It could be vandalized. It could take a rock through the windshield while driving on the freeway. (Duck!)
- Liability insurance covers the costs if you damage someone’s property or injure someone with your car.
- Personal injury protection covers medical costs you and your passengers incur as the result of an accident.
- “Uninsured motorist” protection covers damage to your vehicle if you’re in an accident caused by a driver who doesn’t have insurance or whose insurance is coverage so minimal it doesn’t cover the full amount of damage the driver caused.
This brings us back to the definition of a car insurance deductible.
“An insurance deductible is the out-of-pocket expense the insured agrees to pay toward any repairs resulting from a covered accident,” said Justin Yoshizawa, Director of Product Management at Mercury Insurance. “For example, if you have a $100 deductible and your car sustains $1,000 worth of damage, you must pay $100 of the $1,000 repair cost.”
Car insurance deductibles are typically applied on a per-incident basis, so if you have two accidents the deductible, say $500, would apply to each of those accidents. That differs from typical medical insurance in which expenses you pay accrue to a single yearly deductible.
Most car insurance policies have deductibles for collision and comprehensive coverage. Deductibles are less prevalent for other coverages, and liability coverage almost never has any kind of deductible.
Deductibles are designed to reduce costs for insurance companies — and for the insured — by limiting low-dollar “nuisance” claims that are expensive to administer. If you get a small dent or scratch in your car’s paint, it doesn’t make sense to have that inexpensive repair paid for by insurance.
What deductible should you choose?
“Deductibles of $250, $500 or $1,000 are fairly common, however, as a general rule of thumb, the higher the deductible, the lower the rate the insured will pay for the premium,” Mercury Insurance’s Yoshizawa told us. “Plainly stated, the more money you’re willing to pay out-of-pocket towards repairs, the lower your insurance premium will be and vice versa.”