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If you are looking to purchase auto insurance, or perhaps you already have an insurance policy, I want to be sure you fully understand the “insurance lingo” and how it applies to you. Some of the most common questions I am asked are, “What is a deductible?” and “How high a deductible should I have?” This article breaks down deductibles, a key to choosing an insurance policy right for you.
It is essential that you understand what a deductible is and how it affects your rates.
In short, a deductible is the amount you will owe out-of-pocket before your insurance kicks in should you get into an accident or have other damage to your vehicle. It is important that you choose an amount [deductible] you can afford to pay out-of-pocket, or you will risk not being covered. For example, you agree to a $500 deductible. If you get into an accident that causes $5000 worth of damage, your insurance company will pay $4500, but only after you have paid your $500 deductible.
Related article: How To Save Money On Auto Insurance
Typically, auto insurance deductibles range from $250 to $1,000, although they can be higher. There is no right or wrong deductible amount, it is a personal decision based on what works best for you. I recommend you take a look at your finances, determine a deductible you can afford, and set that amount aside should you need to make an auto insurance claim. Many folks create an emergency fund to help pay their deductible in the event of an accident.
Related article: 9 Steps To Take After An Accident
The amount of your deductible also affects the cost of your premium for auto insurance.
Occasionally, insurance companies may give you a premium quote with a higher deductible. When the deductible is higher, the premium cost will be lower. This may appear like you are getting a great deal! However, this is only beneficial if you never get in an accident. Unfortunately, if an accident were to occur, and you cannot afford that deductible, your insurance policy will essentially not be valid.
Having a higher deductible will not necessarily help you in the long run, if you are in an accident.
It is also important to note that auto insurance deductibles are not the same as health insurance deductibles.
The cost of your annual prescriptions and doctor appointments goes toward your health insurance deductible, and then it resets at the beginning of each year. However, a car insurance deductible must be paid off each and every time you file a claim.
It is also important to note that there is a liability coverage limit, or the highest amount an insurance company will pay out for an at-fault accident. For example, if your policy has a liability limit of $25,000 for property coverage, which is the state minimum in Texas, and you hit a $30,000 car and total it, you could be held responsible for the $5000 difference. Your insurance company is only responsible to pay up to the liability limits of your policy for bodily injury and property damage that you cause in an accident. If you have collision and comprehensive coverage, your insurance company will pay for the repair of your own vehicle or give you the value of your car if is totaled minus your deductible. There is no predetermined set limit on the amount your own insurance company will pay for the repair of your own vehicle after an at-fault accident, as this amount is determined by the value of your car at the time of the accident. Liability coverage limits and deductibles determine how much coverage and protection you have, as well as the amount you will pay on your monthly premium. You should review your coverages and deductibles periodically to make sure they are appropriate for you and your family.
Related article: Limits and Deductibles
I understand these terms may seem a little nerve-racking! It is so important to have a local agent to answer these questions and open a dialogue about your insurance options. Please feel free to email or call me with any of your questions! I will gladly address any of your questions in my next videos and blog posts.