Personal Insurance

How Do Insurance Deductibles Work?

calculating your insurance deductibles

Wouldn’t it be incredible if your insurance covered every tiny little thing that happened to your car?

Say you back into a shopping cart at the grocery store and scratch your bumper. Covered! Someone parks too close and leaves a “door ding” in the side of your car. Covered! Your Chinese takeout spills in the back seat, leaving the interior smelling like garlic and fish sauce. Covered!

If that sounds amazing, just imagine how awesome it would be to pay three, four, even five times as much for your insurance! Because that’s what would happen if your collision/comprehensive policies had to cover every little thing. Plus, this type of 100-percent coverage would mean people wouldn’t be nearly as careful with their cars (or with each other’s vehicles) because the “penalty” associated with anything from minor damage to a major collision would effectively be zero.

Deductibles to the Rescue

That’s why we have insurance deductibles — they help lower premiums for consumers and control costs for the insurance companies, making insurance more affordable for everyone.

Note that insurance deductibles only apply to claims for physical damages to your own vehicle, and unless you’re in a “no-fault” state, a deductible is usually only required for an accident where you’re considered at fault. If someone else causes an accident that damages your vehicle, that person’s property damage liability policy (assuming he or she is adequately insured) will generally kick in to take care of it.

If you’re responsible for an accident involving another vehicle or a stationary object (such as a tree, light pole, or building), the deductible for your collision coverage will apply to repair your vehicle. If your vehicle is damaged by fire, wind, vandals, by hitting an animal, or in another non-collision incident, the deductible for your comprehensive coverage will apply.

Note that both collision and comprehensive insurance coverage are both considered “optional” insurance, though a lienholder (like a bank or finance company) or lessor (if your vehicle is leased) may require the coverage as a condition of your contract.

Keeping a Cap on Costs

But insurance deductibles are more than just the shared cost for making a claim. They serve as effective thresholds of coverage. In essence, having a deductible tells your insurance company you won’t be making a lot of little claims for minor damage. A little “door ding” might cost $75 to $150 to repair. If you have a typical comprehensive deductible, like $500, you’re not going to pay $500 for a repair that costs a third that much. Your insurance company wouldn’t even process a claim that’s less than your deductible.

Because of this, your deductible acts as a cap on claims. It tells your insurance company that you’ll take care of the little stuff, and they can help out with the bigger stuff. Knowing this, your insurer can charge less for your policy.

Picking the Right Deductible

When choosing a deductible for your collision and comprehensive coverage, you have to keep in mind the fact that a higher deductible generally means a lower premium—but it also means you have to pay more out of pocket if you need to make a claim. Similarly, lower insurance deductibles equate to higher premiums, but your personal cost per incident will be less. This is a good topic to discuss with your independent insurance agent.

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