Deductibles share the financial risk of loss between you and the insurance company. The more risk you're willing to take on through a higher deductible, the lower your premium.
When you experience a loss that is covered by your insurance policy, the deductible is the amount you're responsible for before the insurance pays. Let's say you're in an auto accident, and the cost to repair your vehicle is $1,200. If you have a $500 deductible, you're responsible for the first $500 of the repair cost, and your auto insurance company will cover the remaining $700.
Generally speaking, deductibles apply only to your property damage, not the liability that kicks in when you're found legally responsible for injuries to other people or damage to their property.
Auto insurance deductibles vary by state, with options up to $1,000, sometimes more. The most common deductibles are $250 and $500.
Auto insurance policies usually require you to carry separate deductibles for comprehensive and collision coverage. Comprehensive covers events such as fire, vandalism, glass damage and theft. Collision covers vehicle damage due to an accident, regardless of fault. You pay the deductible that applies to the type of claim you have.
Keep in mind, if you are in an auto accident that isn't your fault and the other party has insurance, the damages to your vehicle should be covered under the other party's property-damage liability coverage.
Here are five things USAA suggests when deciding where to set your deductible:
- Choose one you can afford. If you select a $500 deductible, for instance, your emergency fund should have $500 available in case you have a loss.
- Consider the vehicle's value. Determine your automobile's monetary value. That way, you know whether it makes sense to pay for both comprehensive and collision coverage. It can also help you decide how high to set the accompanying deductibles.
- Consider your premium. There's a natural tendency to lean toward a lower deductible. Who wouldn't like their insurance company to pay more at claim time? But carrying a very low deductible comes with a higher bill. Remember, in general, the lower your deductible, the higher your premiums.
- Know what it's meant to cover. As you contemplate your decision, remember insurance is designed to protect you from a financial setback, not cover small losses you can afford to pay out of pocket.
- Avoid extremes. Given the trade-off between deductibles and premiums, it probably doesn't make sense to lean too far in either direction. If you set the deductible as low as possible, you'll pay a considerably higher premium. Set it too high, and you may struggle to cover your share of the cost when something goes wrong.
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