Jan 27, 2013

Car Insurance: Choose the Best Deductible for You

A car insurance deductible is the sum in damages that the customer has to cover using personal resources before the insurer steps in to cover the remainder. For example, if a customer has a $200 deductible and sustains $2,000 in damages to the insured car, that customer has to spend $200 on repairs while the insurer covers the remaining $1,800. Most customers can find car insurance policies attached to a range of possible deductibles. Choosing the right deductible can help them secure enough protection for their cars at reasonable prices.

Comparing High and Low Deductibles

Higher deductibles mean poorer coverage. However, insurance policies attached to higher deductibles also charge smaller insurance premiums. This is because the premiums must cover the insurer's expected loss on the policies. Since higher deductibles reduce the insurer's loss in case accidents occur, it can still earn the same profit even if it charges smaller premiums. In contrast, the premiums charged on lower-deductible policies are more expensive to cover the increased expense to the insurer.

In short, the choice between high and low deductibles comes down to the customer's risk tolerance. Customers can reduce their premiums by choosing higher deductibles, but must risk spending more of their personal resources in the event of accidents.

Factors in Choosing the Right Car Insurance Deductible

Customers interested in choosing the right deductible should first calculate the unexpected expense that their finances can tolerate. Points of particular interest include the portion of their household budgets that can be freed up in case of emergencies, the total funds available to them on short notice, and the cost of those funds. Customers should remember that the total funds available to them on short notice include both their savings and their access to short-term credit, but excludes less liquid investments. For example, $4,000 invested into bonds is not available on short notice because it takes time to sell bonds at prices approaching their fair value. Based on these financial assessments, policies attached to deductibles that cannot be covered in the event of accidents should be disregarded outright. As a general rule, individuals possessing more flexible budgets, higher savings, and access to credit at reasonable interest rates are better prepared to handle high deductibles than their counterparts.

Once the unaffordable policies have been eliminated, customers should focus on estimating their chances of getting into accidents. Examples of relevant factors include their driving habits, their driving patterns, and the time that they spend on the road. Individuals who drive aggressively, fail to follow the rules of the road, and spend more time on the road are more likely to get into accidents. As a result, these individuals should purchase lower deductible policies because they need more protection than their less accident-prone counterparts. In contrast, those same counterparts can afford to choose higher deductibles because their chances of needing the insurance are so much smaller.

Conclusion

To sum up, customers should choose deductibles that are both affordable and suited to their circumstances. Although it might be tempting to choose the highest deductibles possible to reduce premiums, those who do so might end up regretting it should an accident occur.

Dennis Gilroy is an insurance consultant. He enjoys sharing his knowledge on various personal finance blogs. Visit http://www.autoinsurance.us/blog/ to see blog posts for more auto insurance tips.

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