Is Raising Your Insurance Deductible a Good Idea?

by Lee Doppelt

A higher insurance deductible can mean lower rates, but is it really the best move for your finances? We explore how to weigh your options.

You pride yourself on being careful. You’ve never made an insurance claim. In fact, you already receive the no-claim premium discount. Now you’re wondering if it’s time to raise your collision deductible to lower your insurance premium.

It seems like a good idea, but how can you know for sure? You can’t afford to make a big financial mistake. Money is already tight. A big bill could be really bad!

The Real Purpose of Insurance

You might start by understanding what insurance is. In its simplest form, it’s paying a small amount (a premium) to cover the costs of an unlikely event that would be too expensive for you to pay for yourself.

Before insurance, neighbors would simply come and help each other. If a barn burnt down, neighbors would come and help rebuild it.

Insurance companies formalized the process. They use fancy math to determine how much they need to charge for a certain level of coverage for the unpredictable event (a car crash, home fire, etc.).

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How Does Your Deductible Effect Your Premium?

If you’re driving a car that’s no longer financed, good for you. If it’s an older car, you might consider dropping collision and/or comprehensive coverage or possibly increasing the deductible to reduce the premium.

Collision covers repairs after you’ve been in an accident that is your fault. It’s typically a large percentage of your premium, perhaps 50%. Comprehensive covers “everything else” and is actually a small percentage of your total auto insurance premium, maybe 10%.

So what about raising your deductible? According to Forbes, you can save an average of $180 on your premiums by raising your deductible from $500 to $1,000.

Before making the decision to increase your deductible, you need to answer some questions.

How much would you save by increasing the deductible?
How likely are you to make a claim?
Could you afford to cover the deductible if a claim situation happened?

A Few Examples

Let’s consider some hypothetical situations.

Suppose you could increase your homeowners deductible from $5,000 to $10,000. And the likelihood of needing to collect was one in one million. Normally, you’d say, ‘Why not?’ and go for it. But let’s also suppose that you’d only reduce your annual premium by $12. Why would you gamble $5,000 to save $12? You wouldn’t. So you’d leave your deductible alone.

Let’s try another one. Same set of facts except that the savings for the higher deductible would be $120 per year. And you had an emergency fund of $13,000. In that case, you might want to take the higher deductible.

How about one more? Same basic set of facts. Increasing your deductible from $5,000 to $10,000 would save you $120 annually. But you only have $1,300 in your emergency fund. Not enough to cover the deductible and borrowing the difference would be hard, if not impossible. In this case, you’d need to stay with the lower deductible. In fact, you probably should reduce your deductible to $1,000 from the current $5,000.

These examples were based on your homeowner’s insurance, but the same questions apply to auto and even renters insurance policies. Raising your deductible will lower your premium, but you must determine if that’s a good choice for you.

Ways To Lower Your Premium Without Changing Your Deductible

There are other ways to lower your auto insurance premium.

For instance, roadside assistance. If you keep your car well-maintained and are somewhat handy, services covered by roadside assistance, such as changing a flat, are unnecessary.

You may not need rental car coverage either if your family has two vehicles or uses public transportation. Dropping car rental coverage reduces a premium by about $16 each year.

Carefully scrutinize your auto insurance and ask your agent which coverage you can comfortably drop, and determine which limits (deductibles) you can handle financially.

Ask about discounts. You might save by paying annually instead of monthly. Not all companies offer this discount, but some companies do, so you should definitely ask when shopping for lower insurance premiums.

Getting quotes from various companies regularly might be the best way to reduce your premium. Their rates are based on complicated math equations. Different companies use different assumptions, which affects their rates.

Naturally, you want to get the lowest premiums you can for your auto and homeowners/renters insurance policies. We all get a little frustrated when we don’t make a claim for years and the premiums just keep coming.

But remember the purpose of insurance. It’s to cover an unpredictable expense that’s too expensive to pay yourself. The odds might be one in a thousand or one in a million. But that one could be devastating financially.