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Insurance Deductibles 101: What's the Right Deductible for You?


One of the biggest decisions you face when buying any kind of insurance is choosing your policy deductible. When you have a claim, the deductible is the amount you pay out-of-pocket before your insurance benefit kicks in. On one hand, you want to keep your premiums as low as possible, and that usually happens with a higher deductible. On the other hand, you don’t want your deductibles so high that you’ll go broke after filing a claim.Which deductible level is right for you? To answer that question, you’ll need to take three things into consideration:

  1. How much of a risk taker are you?
  2. What is your financial situation?
  3. What is your life/family situation?

First, there’s the psychology side of the decision. Are you comfortable taking risks? Choosing a high car insurance deductible is like betting that you won’t get into a motor vehicle accident. If you’re a super safe driver and you don’t drive in high risk situations, a higher deductible might make sense. On the other hand, if risk makes you squeamish, and your daily commute is harried and treacherous, a low deductible may be a better way to go.

Next, let’s talk finances. As a rule, your deductible should not exceed the amount you keep in your short-term, rainy day savings account. When you’re in a car accident, or your house is damaged, you’ll need to get repairs fast. You will have the pay the deductible amount out-of-pocket, so you want to be sure that money is readily available. If you have extra money set aside, or plenty of discretionary income every month, you can afford to take more risk and set your deductibles higher. If you’re living paycheck to paycheck, or you don’t have much in your short-term savings account, it’s probably best to keep your deductibles low.

Finally, let’s look at the predictability of your life, including your monthly cash flow and obligations. if your monthly income and expenses are somewhat predictable, (for example, you earn a steady salary and you’re single), you can probably afford to take a little more risk with a higher deductible. If you have a family, or your income and expenses can be erratic (for example, you’re a real estate agent who earns commission with five kids who have crazy sports expenses), then a lower deductible may be smart.

Isn’t it common knowledge that raising your deductibles will lower premiums and save you money?That’s popular money-saving advice. But is it good advice?

That depends on your situation. First, saving money by raising your deductibles assumes you have the financial resources to cover the out-of-pocket expense in case of a claim. For example, if you raise your auto insurance deductible from $200 to $1,000, you’ll see your premiums go down. But what happens if your car needs $3,000 in repairs, and you don’t have the $1,000 deductible? That little bit of savings on your monthly premiums won’t matter much to you when you’re stranded.

Also, consider the math …

While a higher deductible will probably save you money each month, it may not be that much money. For example, let’s say you save around $5 a month by raising your comprehensive auto insurance deductible from $250 to $500. If you ever make a claim and have to pay the extra $250 out of pocket, it’ll take you 50 months to recoup that extra $250 through premium savings. Here’s the bottom line: When you get an insurance quote, find out the rates for all the deductible options and do the math. You may find that the short-term savings isn’t worth it for you.

As you can see, your life, your finances, and your appetite for risk all play a role in the decision you make about deductibles. Consider how much money you’re willing to sacrifice before your insurance benefits kicks in, and balance that against what you’ll save on your premiums by raising your deductibles.

There’s one more way to make sure you’re choosing the right deductibles: Talk to a FICOH independent agent.