MoneyLife

How Does Car Insurance Deductible Work?

By LaKenya Hill
how does car insurance deductible work

A car insurance deductible is an out-of-pocket fee that you are responsible for when you get into an accident. You’ll need to pay your deductible before insurance will start paying for any necessary car repairs. In the event that you need to file an insurance claim, you will be required to pay a deductible. 

This deductible can be high or low depending on your car insurance plan. Traditionally, higher deductibles are associated with lower monthly payments, and lower deductibles are associated with higher monthly payments. 

If you own a car, then you’ll want to familiarize yourself with auto insurance and deductibles. Let’s take a look at how car insurance and deductibles work!   

How does car insurance deductible work? 

Auto accidents are an unfortunate but common occurrence, and insurance is a way of protecting yourself from financial hardship in the event of an accident. Without insurance, auto accidents can result in a financial nightmare when you factor in all of the financial aspects of repairing the damage caused by accidents, including auto repair costs and legal fees. 

If you need to pay for auto repairs stemming from an accident, you would be required to pay a pre-arranged deductible before the insurance company will start contributing. So, let’s say your car requires repairs that amount to $1,500 and your deductible is $500. You’ll be required to put $500 out-of-pocket towards the cost of the repairs before your insurance company will pay for anything.  

Subsequently, your insurance company would follow up by paying the remaining $1,000 balance for the car repairs. Instead of being responsible for a $1,500 repair bill as the result of an accident, your insurance company will step in and pay the balance of your repair because you are insured through them. 

Deductibles are different for everyone, and they are based on many unique factors. Your insurance agent can help you select a plan and a deductible that will best fit your needs and your budget.

Which auto insurance coverage types have deductibles? 

Car insurance is an important aspect of owning a car. There are several details to consider when shopping for car insurance, like the different coverage types and their associated deductibles. 

There are different types of car insurance, and each type has its own set of rules and regulations. The type of insurance that you’ll be required to purchase will vary from state to state, so it is always wise to research the requirements in your state. 

Liability 

Liability insurance pays for the costs associated with accidents where the property is damaged or another person is injured. While you might be the only person injured in an auto accident, it’s possible that other people or their property might be hurt, too. 

In that case, you will need liability coverage in order to assist with the cost of medical care or property repairs for the other party. Liability insurance typically pays for the other driver’s vehicle, property repairs, lost wages, and medical expenses, as well as the costs of your legal representation if the other party takes legal action against you. 

Most states require liability insurance regardless of whether you lease your car or you own your car. Also, liability insurance does not come with a deductible like comprehensive and collision insurance typically do. 

Comprehensive 

Comprehensive coverage is a type of insurance that provides protection against unforeseeable events that can happen to you on the road. Flooding, theft, and significant weather events are just some of these incidents. 

Comprehensive coverage typically covers events that are not categorized as collisions. While comprehensive coverage is not required if you own your car, it is required if you are paying back an auto loan or if you’re leasing your car.

Collision 

Collision coverage is insurance that covers the cost of vehicles that have sustained damage as the result of an accident. Incidents such as car crashes and rollovers or accidents where a driver hits a pole or drives into a fence are usually covered under collision insurance. 

Once your deductible has been paid, collision coverage will cover your car’s repairs or replace your car with a car of the same cash value. Collision coverage is not required if you own your car, but it is required if you are paying off a car loan or if you’re leasing a vehicle.

Personal injury protection (PIP) and uninsured motorist 

Many states require personal injury protection (PIP) coverage, which is also known as no-fault insurance. PIP covers medical expenses and possible lost wages, regardless of who is at fault in the accident. PIP not only covers the policyholder but also covers the passengers whether they have health insurance or not. 

In the event that you are hit by a driver who does not stick around long enough for you to get their information, or the other driver does not have enough liability insurance themselves, you’ll have protection thanks to your uninsured motorist coverage. This coverage protects you from having to pay for an accident that was not your fault. 

How will your car insurance deductible impact your rate? 

Insurance deductibles vary from one plan to the next, and deductibles will impact the monthly rate that you’ll pay for your premium. Higher monthly premiums will result in a lower deductible, and lower monthly premiums will yield a higher insurance deductible. 

You should always talk to your insurance agent in order to ensure that you are choosing the premium and deductible split that makes the most sense for your situation.

Factors to consider when choosing a car insurance deductible 

Choosing an insurance deductible is an important decision to make, and you’ll often select your deductible while shopping for car insurance. Some things to consider when selecting a car insurance deductible are as follows. 

Monthly premiums

Knowing how much money you’re able to put towards a car is vital. Between the cost of the vehicle, maintenance, and fuel, the additional cost of a high insurance premium can dramatically impact the monthly expenses of your vehicle.

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Deductible

Insurance deductible rates can range anywhere from $100 to $1,000. Would you be comfortable putting $1,000 towards your deductible? And is that amount of money accessible to you in the event of an accident? 

This will be a major factor in deciding the insurance deductible rate that is ideal for your situation. While a high deductible is an extra expense, it may be worth it compared to the costs of auto repairs resulting from an accident. 

Driving record

Although accidents are not planned events and can happen to anyone, a lower premium with a high deductible might work better for someone who has a clean driving record. A driver who hasn’t driven a lot or makes sure they drive carefully might benefit from having a higher deductible because they are less likely to ever make an insurance claim. 

Value of vehicle  

A vehicle that isn’t worth much money may not be worth covering with a high deductible. It would be ill-advised to pay an exorbitant amount of money in deductibles for a vehicle that is old or in poor shape. A high deductible could exceed the value of the vehicle in some cases, which doesn’t make sense from a financial perspective. Make sure you take this into consideration when deciding on a car insurance deductible.

What deductible is right for you? 

Car insurance is a valuable tool that is designed to protect one of the most expensive assets that people own. Understanding the nuances of coverage types and deductibles is important when navigating your way through car insurance plans and rates. 

Car repairs can be expensive, and having the peace of mind that insurance offers is a significant advantage. Though the rates will be different when buying insurance for a new car versus an old one, you still want your asset to be protected while making an affordable choice. 

Insurance is an expense you have to stop on top of, so be sure to use your mobile banking app to track your accounts. With the personal banking app from MoneyLion, we make it easy for you to stay on top of your finances from one place. 

There are so many other things to manage. So, let MoneyLion take some of the trouble out of making sure your finances are in order.

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