Great Savings Tip #85 – Insurance Deductibles

Higher insurance deductibles can save money.

Save With Higher Deductibles.  Almost everyone carries at least some kind of insurance so you may already know that the deductible you choose will affect the rate you pay.  Still, before renewing your policy it’s good to review a few facts.


What’s A Deductible?


A deductible is the amount you have to pay if you have an insurance claim.  For example, let’s say you get in a very minor car accident and have a $500 deductible on your auto policy.  You take the car in for an estimate and discover the cost to have it fixed will be $350.  Now, since your deductible is $500, you have to come up with $350 of your own money for repairs.  Or say the repairs are more extensive than you realized and the cost to fix the car is going to be $1200.  In this case, you’ll pay your $500 deductible and the insurance company will cover the remaining balance of $700.  Though any deductible may represent more than you want to pay out, it’s also the upper limit of your out of pocket costs.  In other words, even if the repairs were $2000 you’d still only have to come up with $500.


Higher Deductibles Equal Lower Premiums


How safe is your car?  Will you suffer a loss?

Some cars are more expensive and get stolen more often. Will that matter for your coverage?

Depending on your circumstances it may be worthwhile raising some or all of your insurance deductibles.  With a higher deductible the annual cost of insurance goes down.  This means the more willing and able you are to pay a portion of your insurance claims, the less your annual premiums will cost you.


Now, for some people, any out of pocket expense for a claim can end up being a financial nightmare.  If you’re barely scraping by in the first place, coming up with funds to cover a deductible of several hundred or a thousand dollars may be impossible.  However, if you have set aside enough savings to cover a larger deductible, then you should come out better in the long run by paying a smaller premium.


Can I Really Save Money?


Wind damage is hard to predict.

You never know when you’ll experience a bad loss.

According to the Insurance Information Institute, if you currently have a $500 deductible on your home insurance and if “you can afford to raise your deductible to $1,000, you may save as much as 25 percent.”


How would that work out?  Say your home policy requires a $500 deductible and costs $800 per year.  By raising your deductible to $1000 you may save up to $200 on premiums (i.e. $800 x 25%).  Now, if you have a claim right away then you’d come out behind—$500 extra out of pocket for the higher deductible, minus $200 in insurance premium savings, puts you $300 in the hole.  However, if you’re claim free during the first year, you just made an extra $200!  And if your luck holds out over 10 years, that turns in to an extra $2000.


Because every home and area is different, you’ll need to check with an insurance agent to see if the example holds up for you.  Also, consider that some homeowner’s polices may have separate deductibles for weather related claims like wind or hail.  Again, check with your agent to determine if this applies.


Finally, the Insurance Institute also says you can save between 15 to 40% on your collision and comprehensive auto premiums by choosing a higher deductible.  In fact, any type of insurance will cost less when you select a higher deductible so the issue is to figure out what makes the most sense given your situation.


Other Considerations


Here’s a list of issues to consider as you decide whether to pay a higher deductible to save on premium:


Car insurance:


(1) Your record: If you have a poor driving record you’ll be paying more for insurance all the way around.  On the other hand, if you’ve had few accidents and you can keep it that way you can save a lot over the long term by raising your deductible.


(2) Your age:  Younger people may have fewer savings to pay a claim, and as less experienced drivers, they tend to have more accidents.  They may want to stick with lower deductibles.  Older drivers may also have a higher risk of accidents, especially as they start slowing down physically.  Plus, for anyone living on a fixed income who lacks sufficient savings, paying extra out of pocket expenses can threaten the ability to meet basic living expenses. These folks may also want lower deductibles.


(3) Your vehicle. Some cars like Hondas have a high theft rate so if you go to buy a vehicle and want to reduce the risk it will be stolen, do a little up front research first to find out the risk.  Also, some cars are just more expensive to repair than others.  If you’re trying to save money by increasing your deductible, you might easily lose any savings if your car is stolen or if you have bigger repair bills.  To see how your make and model compare for the cost of insurance claims see this post at the Insurance Institute For Highway Safety.


Home insurance:


(1) Is there more than one deductible on your home—for example, for weather or other losses?  If there’s a potential to pay multiple deductibles make sure you can afford the combined total before raising your deductible.


(2) You may be able to make your home more disaster resistant than it currently is, or it might already have the ability to stand up to some disasters.  For example, you might have wind ties connecting your walls and rafters or you might have a built in fire sprinkling system.  Check with an agent to see if there’s anything you can do to lower the risk of potential claims, and also make certain he or she  knows what’s already in place.  Having a history of no or minor claims can go a long ways towards deciding whether to raise your deductible.  Keeping your home in top form by doing simple maintenance can help in this effort too.


Health insurance:


Do you expect to need a lot of healthcare?

(1) Older people or people with chronic disease generally have more medical claims.  The high costs of multiple doctor visits can add up quickly making higher out of pocket deductibles risky.


(2) Women tend to have more medical claims in child bearing years.  Again, the more doctor visits you expect to need the better it is to consider a lower deductible.


(3) Young people who are healthy and who limit their exposure to less risky sports, or who avoid taking drugs or alcohol will have far less need for medical care.  Plus, if hit with a large medical bill, younger people may have more time to recover financially.  This can make higher deductibles worth consideration.


(4) Children in daycare and other early childhood education are constantly exposed to viruses and bacteria and may require fairly regular doctor care as a result.  Other children may have certain conditions which make them more susceptible to contracting illness.  Take your family’s health history into account as you consider whether to raise or lower your health insurance deductible.


Beef Up Your Emergency Savings


As you consider the cost of your premiums in relation to your out of pocket deductibles it is good to remember that you may carry multiple deductibles.  In other words, you can have one for your house, another for your car and still another for your health insurance.  Hopefully, you’re in good health, accident free, and you’ll stay that way.  However, should you have more than one claim at a time, you still want to be able to afford the out of pocket costs.  That makes it important to (a) beef up your savings for an emergency and (b) understand the potential risk of having multiple claims all at once, and thus, the risk of paying out more than you can afford.


Final Thoughts:

There are lots of variables in insurance that may make increasing your deductibles either a good or not-so-good thing for you.  It’s not a one-solution-fits-all situation.  Ultimately, you know your history around insurance claims and the types of risks you are willing to take.  Whatever you decide has to make sense for your situation.  However, don’t dismiss potential savings out of hand, because they can add up to thousands of dollars over time.  To make sure you’re on the right track, check with your agent and consider getting an online quote or two to compare the cost of premiums.  Then decide if raising your deductibles make sense.


Keep In Touch


You can register with our site and we’ll send you an automatic notice for all our new posts. Thanks for stopping by and have a great day!


To see a list of all our Great Savings Tips click here.

[ad] Empty ad slot (#1)!

Empty ad slot (#1)!

Comments are closed.


Favorite Pages