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.
“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.
“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.”