What is a deductible?

This is the word you see most often when insurance companies talk about the best way to get a reduction in your premium rates. All you have to do, the smooth voice says, is increase the deductible and we’ll give you a 10% discount. And, it’s a fact. It sounds like a good deal. So why are insurance companies so keen for you to increase the deductible? The answer could not be more simple. Whatever deductible you sign up for is the amount you pay if you are involved in a traffic accident or incur a liability of some kind connected with your ownership of a vehicle. That means you pay and not the insurance company. This is a cool idea (from the insurer’s point of view). You insure yourself. All the premium pays for is cover in case your losses amount to more than the deductible. This is great. The insurer collects a premium, and you pay the first however many dollars of the claim. Since the majority of claims are for small amounts – fender benders rarely cost that much to repair – the insurer is on a winner. In fact, the bigger the deductible you sign up to accept, the better off the insurance company is. OK, the company does give you a discount, but it’s rarely an adequate amount. Let’s see how it works out.

Suppose you opt to pay the first $1,000 of every claim and the insurer gives you a 10% discount, are your savings $83 a month? If they are and you are unlucky enough to have an accident at the end of the year, you will have broken even. Your $1,000 in savings just got paid out as a lump sum at the end of the year. Except, of course, there’s a Parkinson’s Law of money in operation – spending wipes out money available. In other words, we usually spend what we have. This leaves you without savings and so that cash sum has to go on your credit card with interest until you can pay it off. In reality, most people end up out of pocket if they have to pay the deductible on one accident. Now imagine the case if your luck is really bad and you have two accidents in the same year. Do you really have $2,000 lying around on the off chance of two insurance claims? Now before we get all depressed, there are a range of other ways in which you can save money on your premiums without increasing the deductible. Use the online search engine on this site to get auto insurance quotes from as many companies as possible.

Explore the different options. If you have the cash or can borrow, think about changing to a make and model of car that’s cheaper to insure. If there’s no chance of trading to a less expensive vehicle, look at the options of driving less, building up a driving record with no moving traffic violations and no claims, bundling your home insurance with the same company, and so on. All the companies offer different discounts and savings. By getting multiple auto insurance quotes, you can judge which discounts will give you the best overall savings. You should only increase the deductible if you can genuinely afford to pay out that initial sum and you are feeling lucky. If there are no other discounts or savings, and you are desperate, then playing with the deductible will reduce your premium. Once committed, it’s all down to the power of prayer to keep you financially safe.

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