If you thought that auto insurance was just a coverage plan that pays for the repairs of your car in case of an accident, and that is all you need to know about car insurance, boy you were wrong. There are so many different things associated with auto insurance coverage which makes it far more complicated. From coverage limit to no claim bonus, people who drive need to know so much so that they can make better decisions, get a better auto insurance policy and save a lot of money. This article will focus on auto insurance deductibles.
The thing about insurance deductibles is that you don’t know about them unless you either get auto insurance or read extensively about them. So what is an auto insurance deductible and how does it work? This article will cover everything you need to know about deductibles and increase your auto insurance knowledge. When it comes to auto insurance, the more you know, the less you pay!
Understanding Auto Insurance
The number of cars in the US has been increasing manifold. And so are the rates of road accidents. This calls for a need for auto insurance. Insurance is an official and legal commitment from a company to the policyholder that ensures to pay for certain damages if the policyholder pays premiums regularly. So you pay some amount each year or every month and in case of an accident, the insurance company will cover the charges of repair or medical treatment.
There are three types of major auto insurance you can get; liability insurance, collision insurance, and comprehensive insurance. With the power of the internet, a little bit of research will help you get auto insurance cheaper than ever. This availability has increased the number of people getting auto insurance.
Liability insurance is the mandatory insurance policy that does not cover your damages, but the damages you do to others’ property or injury to the body in an accident. There are no deductibles associated with this policy so we’ll leave it here.
Every other auto insurance policy, such as comprehensive, collision, uninsured motorist, personal injury protection, etc covers your vehicle’s damages or your bodily injuries (medical treatment costs, etc). All the insurance policies that cover your damages and injuries come with deductibles.
What is Auto Insurance Deductible
A deductible is the amount of money that you have to pay before the insurance company before company pays for the coverage amount. Every auto coverage that insures your personal property or bodily injury comes with a deductible. Not just auto insurance but every other insurance policy has either a deductible amount or something similar.
For example, if you got an auto insurance policy with a coverage limit of $10,000 and the deductible amount is set to $1,000, then in the event of an accident when you claim your policy, if the cost of repair or treatment is $7,000, you’ll first have to pay $1,000 and then the company would pay the rest $6,000.
But what if the cost of repair or treatment is $700? Then you cannot make a claim, because the insurance company will only pay if the cost of treatment or repair is more than the deductible. You can decide the amount of deductible, which can range from any amount over a minimal set limit and a maximum set limit. But why do deductibles exist?
Why Deductibles Exists
You might be wondering why insurance companies have this concept of deductibles, right? Deductibles save insurance companies a lot of hassle and money and it is a way of insuring their investment. How? Here’s how.
First, deductibles prevent policyholders from making trivial claims, maybe as a dent, a fender bender, etc. Each claim settlement takes a lot of time and money since the agent has to verify everything and then process the claim. So a deductible ensures that people will take care of minor repairs by themselves.
The second reason and perhaps the most impactful one is it makes policyholders cautious. Let’s say you get the insurance that covers all vehicle damage. You’d be driving without a single care in the world since no matter what happens to your car, the insurance company will pay for it. Multiply this by hundreds of thousands of people and you get an insurance company that goes bankrupt within days.
But now add a deductible amount that says the policyholder will have to spend $1,000 or $2,000 first, then the insurance company would pay the rest. No one would want to spend a grand from their own pockets. This is what makes deductibles so important to insurance companies.
How Deductibles Affect Your Insurance Rates
Deductibles are inversely proportional to your insurance premium rates. It means that if the deductible amount is increased, your premium rates will decrease. Inversely, if deductibles are reduced, premiums will increase. This creates a situation where the policyholders must make a decision based on their judgment.
If you increase the deductible amount, the premium rates will decrease. This saves you a lot of money. But in the case of an accident, you’ll have to pay more money from your pockets. If you do the opposite and increase deductible amounts, you’ll be paying more in premiums which is a downer. But the good thing is in the case of an accident, you won’t have to pay too much from your pockets.
So what should you do? Apart from finding the sweet spot between the right deductible amount and premium price, you can increase the deductible if you think the risk of an accident or theft or any other factor that might affect your car is low. Do the opposite if your area has a higher risk of theft, and vandalism or you are more prone to hitting another car or a pole. That was all about auto insurance deductible and how it works.