If you’re trying to balance your deductible with your premium without leaving yourself too exposed, you’re not alone. It is a balancing act and there isn’t a clear cut formula you can use to determine what works best for you.
Here’s why people choose a higher deductible or a higher premium and what you should consider when calculating your costs.
Your deductible is the amount you pay out of pocket when you file a claim. Typically, deductibles only apply to claims filed for your own property. Liability claims for another party’s medical bills or damaged property don’t normally have a deductible.
Deductibles ensure policyholders remain responsible and only claim when needed. Usually your policy specifies a deductible amount, such as $1,000. If you need to file a claim, you pay the $1,000 and then the insurer pays for the balance of the repairs up to the policy limit.
The Deductible/Premium Relationship
Generally, your insurance premiums and deductibles have an inverse relationship. If you choose a lower deductible you pay higher premiums, but you pay less out of pocket when you file a claim.
Conversely, a higher deductible leads to lower insurance premiums. You pay more out of pocket when you file a claim. The insurer offers lower premiums, because the total potential claim amount drops.
For instance, if you have a $10,000 claim with a $500 deductible, the insurer could potentially pay out $9,500. If you increase your deductible to $1,000, the most they would pay is $9,000.
Is A Higher Deductible Worthwhile?
Obviously, the chance of paying more out of pocket is only worthwhile if it lowers your premiums.
However, raising your deductible is only feasible if you can afford to pay the higher amount when you file a claim. If shelling out $1,000 would strap you financially, it’s not a good choice. You wouldn’t have the money to get your car repaired or it would seriously impact your quality of life.
If you have a healthy savings account, increasing your deductible could lead to considerable savings.
Get Professional Advice
If you’re still unsure about the right balance for you, talk to an insurance professional. Insurance companies base premiums on many factors and every person’s needs differ.
Drivers with many claims, less expensive, or leased vehicles may want an auto insurance policy with a lower deductible. Good drivers may find a high collision deductible and low comprehensive deductible offers the best value.
If you own a home, a higher deductible homeowners insurance policy could reduce the cost of your premiums by as much as 20%, but once again this depends on your circumstances. If you’ve filed multiple claims, a lower deductible is often a better choice.
However, the average homeowner only makes an insurance claim once every nine years so a higher deductible can lead to overall savings. Nonetheless, you need cash to cover the deductible if you ever need to file a claim.
Let our team of insurance professionals help you decipher what works best for your financial situation. We’ll do the math so you can make an informed decision.