The insurance industry permeates all manner of media: television, radio, magazines, mailers to your house, and outdoor billboards are covered in advertisements convincing you that switching to the next company will save you hundreds of dollars on your car insurance. While comparison shopping is always a fantastic idea, there are other ways to save money on your insurance. Raising your insurance deductible will save you money at any insurance company, so include it in your cost comparisons before making an insurance switch.
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What is an Insurance Deductible?
An insurance deductible is the amount of money you want to self-insure your property for before insurance kicks in to cover any losses. You’ve seen it on your car insurance quote; you have two coverage deductible options of comprehensive and collision. If you set your collision deductible to $250, any damages above $250 will be covered by insurance after you pay the deductible. The higher you set your deductible, the more you pay out of pocket if you file a claim with the insurance company.
Deductibles are a way for the insurance company to force you to have some skin in the game when you have an accident. They make you stop and think:
Should I really file a claim for this, or just pay out of pocket? Will my premiums go up by filing a claim?
Higher Deductible, Lower Premiums
Most types of insurance provide several different deductible levels so you can customize your quote. The lower your deductible, the more risk the insurance company is taking in covering your property. To counteract this risk, they charge a higher annual premium for the insurance.
But if you are looking to save money, you can raise your insurance deductible and lower your annual insurance costs. The drop in the annual cost won’t cover the increase in your deductible in one year, but after many years with no claims you will have saved more than what the increase in the deductible was.
For example, with my insurance company I currently have $500 collision deductibles and $250 comprehensive deductibles on both of our family vehicles. If I were to raise both collision deductibles to $1,000 I would save $24.10 per 6 months. My initial premium is $431.10 per 6 months, so my cost savings is 5.59%. Over a 12 month period I would save $48.20. I wouldn’t even have to switch companies to save 5% on my insurance.
Note: Your savings will be different, so call your insurer to check the exact amount you’d save if you increase your deductible.
Risk for the Financially Unprepared
In the above example, I would save $48 per year on my insurance by increasing our collision deductibles by $500 per vehicle. It would take over 10 years of saving the lower annual insurance amount to cover the increase in one deductible, so if you are accident prone or find yourself filing an insurance claim often this move can hurt you financially.
Even if you rarely file a claim, those who are financially unprepared should not increase their potential out of pocket costs without a plan. Increasing your car deductible by $500 could be covered by cutting back on expenses for a few months. But what if you raise your homeowners insurance deductible from $500 to $2,500? Do you have an extra $2,000 sitting in your emergency fund, ready to be deployed if you need to file a homeowners claim?
The worse place to be when it comes to insurance is needing to pay your deductible so your insurance can cover a huge loss such as a home. But if you don’t have the money to pay the deductible, the insurance doesn’t come into play and you could lose everything.
Be careful in deciding how high of a deductible you need. If you are financially stable and have a healthy emergency fund, it can be worth the risk to pocket the savings on the annual premium.
Kevin Mulligan is a debt reduction champion with a passion for teaching people how to budget and stay out of debt. He’s building a personal finance freelance writing career and has written for RothIRA.com, Discover Bank, and many others.