When you sign up for auto insurance, you usually have to carry a minimum amount of coverage set by the state where you live. And in most cases, the minimum amount of coverage is not nearly enough to ensure that you are truly protected in the event that you are responsible for an accident or are hit by an uninsured driver. Plus, minimum coverage usually doesn’t cover damage to your vehicle, and that’s something most drivers should have.
While it’s usually not a good idea to skimp on insurance coverage, one area where you have some flexibility with your car insurance is your collision deductible and comprehensive insurance.
If you’re not familiar with the term, your deductible is the amount you’ll have to pay before your insurance company will pay on a claim. As an example, if you are found at fault in an accident with $5,000 in property damage and you have a deductible of $500, you will have to pay $500 and your insurer will pay the remaining $4,500.
Simply put, a higher deductible gives you more skin in the game and reduces the likelihood that your auto insurance company will have to make a large payment on your behalf. Common deductibles on auto insurance policies are $250, $500, and $1,000, although others are certainly possible.
Reasons why you might want a higher deductible
The most obvious reason to consider a higher deductible is to save money on your auto insurance costs. According to insurance giant Progressive, changing your collision deductible from $500 to $1,000 can lower your premium by about 28%.
Beyond the cost savings, a higher deductible may make sense if you have a particularly safe driving record. However, an accident-free past does not guarantee the same in the future, and you certainly cannot predict when someone will hit your car, when a tree branch will fall on it, etc.
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Reasons to think twice
There are a few key considerations that can make a higher deductible a less than ideal way to save money. If you’re a younger driver, or you don’t exactly have a great driving safety record, it may be better to leave your discount where it is.
Financially, you want to make sure you (at a minimum) have enough money in an emergency fund to cover your entire deductible if you are in an accident. You certainly don’t want to tap into your retirement savings or charge up your credit card if you’re on the hook financially for an accident.
If you decide to increase your deductible, you’re always rolling the dice to one extent or another. Taking a chance doesn’t make much sense if you’re not prepared for the potential impact if things don’t work out in your favor.
There is no way to know for sure what the best move will be
Of course, no one has a crystal ball that can tell you if and when you will get into an accident, and what the financial implications will be. Therefore, there is no way to know which decision will be the best.
Think of it this way — if you decide to keep your deductible low and end up accident-free for years, you might feel like it was a missed opportunity to save some money. On the other hand, if you increase your deductible from $500 to $1,000 and cause an accident, you’ll wish you hadn’t.
The bottom line is that there are several factors to consider when evaluating your car insurance discount. If you have a safe driving record, want to minimize your monthly expenses, and (most importantly) will be able to absorb a higher cost in the event of an accident, increasing your deductible may be a smart idea. . But if all these things are not true, it might be a better idea to leave it alone.
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