What does 500 deductible mean in car insurance

The deductible is the dollar amount “deducted” from an insured loss. In other words, the deductible is the amount that a person must pay out of pocket for repairs or replacement after an accident. For Example: let’s say you are in a fender bender, the total cost of repairs is $1,000, and your insurance company pays $800. The amount you are responsible for paying (your deductible) is $200.1 For many consumers, determining just how much of a deductible to take can be a difficult decision.

How does a car insurance deductible work?

Conventional automobile insurance policies generally require the consumer to select one deductible for comprehensive coverage, and a separate deductible for collision coverage, although they may be the same deductible amount. The liability coverage in the policy does not involve a deductible.

Comprehensive coverage protects your vehicle from theft and damage not caused by a collision. The deductible on your policy will apply if you file a claim for damage covered by comprehensive, however there are some instances in which you don’t have to pay a comprehensive deductible. For example, cracks or chips in your windshield may be paid in full by your insurance company depending on the state you live in.

Collision coverage pays the costs of any damage to your vehicle caused by a collision with an object when you are at-fault. Any claim you file for damage that is covered by collision will be subject to a collision deductible.1

The higher a deductible, the lower the annual, biannual or monthly insurance premiums may be because the consumer is assuming a portion of the total cost of a claim. Keep in mind that the deductible amount will come out of the policyholder’s pocket in the event of an at-fault car accident, which could overshadow the premium savings.

Conversely, a low deductible will increase the premium payments. If the policyholder does not have an at-fault accident resulting in a claim, the individual has paid more for automobile insurance than someone with a higher deductible.

When do you pay the deductible for car insurance?

A better question might be, when do you not have to pay the auto insurance deductible? In most cases you’re on the hook for it, however if you’re in an accident which another driver is at fault for, this is not the case. You also don’t pay a deductible if the claim you’re filing is covered under liability insurance, which covers injuries and property damage in accidents you are at fault for. This is only the case as long as the costs fall within the range of the coverage you purchased, however. Lastly, a diminishing deductible may ultimately lead to a reduced deductible or even none at all. This kind of deductible rewards drivers for avoiding accidents by reducing their deductible each year they remain accident-free.

When you’re choosing a deductible, keep in mind that you may be more or less comfortable with higher out-of-pocket costs vs monthly costs. A high deductible will lower your overall insurance rate, however it will increase your out-of-pocket costs if you file a claim.1

Five questions to help you choose the right car insurance deductible

In determining the right deductibles, here are five questions to consider before making the decision:

1. How do different deductible levels affect the insurance premium?

   This is a good question as no two insurance companies will have the same deductible-premium ratio, and states differ on their regulatory approach to the subject. Each state may have different rules regarding the way a deductible is incorporated into an insurance policy. By and large, increasing the dollar deductible from $200 to $500 could potentially reduce collision and comprehensive coverage premium costs by 15% to 30%, whereas increasing the deductible to $1,000 may save 40% or more.

2. What’s the downside of a high deductible?

   Let’s say an unknown driver has inadvertently sideswiped a car, costing the owner $800 of damage. The owner has a $1,000 deductible. That $800 now comes out of the owner’s wallet. However, if the owner had a $100 deductible, the out-of-pocket expense would be only $100, providing a savings of $700.

3. Is it better financially to have a low deductible and a higher premium?

   That depends. Someone with a low deductible/higher premium ratio can go through a 10-year period without filing an insurance claim. The person will end up having paid more money over that time in total premium than someone else with a higher deductible. Alternatively, a person can end up filing several insurance claims in just a few years.

4. So how does someone decide which solution is best?

   Some questions to ask yourself include:

   • Are you comfortable taking on some financial risk through a higher deductible or does this prospect make you uncomfortable?
   • Do you have the financial means to pay the high deductible if you had to do so?

   If you are currently experiencing financial difficulties, it might seem that a high deductible is best because it will lower the total premiums. But if you are in an at-fault accident, will there be enough cash on hand to pay the deductible? A best practice is to create an emergency fund to cover the higher deductible before actually taking it.

5. How does a person’s driving record affect the choice of deductible?

   The current thinking is the cleaner the driving record, the greater the consideration one should give to a higher deductible as it will lower premiums. On the other hand, for someone with a less-than-clean driving record, the person should consider taking a lower deductible, despite the additional premiums. You can also consider a program that rewards safe driving, like Nationwide’s Vanishing Deductible, which allows you to earn $100 off of your comprehensive and/or collision deductible for every year of safe driving. Up to $500 total.1

The bottom line is that choosing the right deductible takes time and consideration. A specialized insurance agent can help consumers make the best decision based on their driving record, current finances, credit record and overall financial planning goals.

1 https://www.bankrate.com/insurance/car/car-insurance-deductible/, Accessed December 2021.

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