How to Calculate Auto Insurance Deductibles

Posted on: 11Feb,2016

The amount of money that you need to pay out of pocket for auto repairs before your insurance covers them is referred to as a “deductible.” For example, if you have a $500 deductible and you are involved in an accident that causes $3,000 in damages to your vehicle, you have to pay the $500 before your insurance will pay for the $2,500 that remains. One of the primary ways that individuals can save money on their premium rates is by raising the amount of their deductible.

It is important to understand what your different insurance coverages do and this is especially true where deductible is concerned. However, it is important that you examine your budget in order to determine how much of a deductible you can afford. One of the worst things that could happen is getting in an accident and then not being able to pay the required deductible amount. So you will want to take the following into consideration:

• your available credit
• your household budget
• your income
• your personal savings

In order to get the best coverage value for the money, you have to take your deductible into account.

How does Your Deductible Work?

When it comes to the overall price you will pay for your premium, one of the key factors used to determine how much your rates will be is the amount of deductible that you choose. Basically, your deductible is what you must pay out-of-pocket before your insurance kicks in (see opening paragraph). Deductibles function in much the same way that co-pays work on healthcare and medical coverage. Plus, they also serve as a deterrent by discouraging people from making doctor’s appointments for trivial reasons.

Factors involved in determining the Deductible

For all intents and purposes, the primary factor that helps individuals determine the amount of their deductible is personal preference. Since deductibles are such a key factor in the decision-making process, so the insurance company typically leaves this up to the client. For the most part, deductible amounts are fairly standard throughout the auto insurance industry i.e., $100, $250, $500, and $1,000. So the premium rate is adjusted either up or down depending on the deductible amount that is selected.

This also works in favor of the insurance company because the higher the amount of the deductible, the lower the amount of the claims that they have to pay for. There are 4 factors that consumers commonly refer to when they are determining the amount of deductible to choose including:

• California state laws – California has minimum liability coverage requirements that every driver must meet in order to be legal. You can find out these minimums by searching online or talking to an insurance agent.

• Choose a deductible amount that you can handle financially – even if you have the financial means to afford a higher deductible amount, you may still want to opt for a lower one. Some consumers actually opt for a higher deductible because the threat of a bigger out-of-pocket expense could deter them from making unwarranted claims.

• Doing the math – the psychological uncertainty involved with raising the amount of deductible depends on how much risk you are willing to tolerate. Although it varies by insurance company, doing the math is far simpler.

• Financing company’s or lessor’s requirements – financing companies, lenders, and leaseholders have certain requirements for establishing the amount of your deductible. So you want to make sure that you review your lease agreement or financing contract so that you follow their guidelines to the letter.

• The bottom line – in the end and given all of the factors above, it’s all a matter of personal preference. If you can handle the added expense and want a lower premium rate, choose a higher deductible. Conversely, if you can handle paying a higher premium rate than opt for a lower deductible amount.

The savings that you experience from taking a higher deductible amount enables you to build up enough funds to cover any emergencies or if you get into an accident and have major damage to your vehicle. In the end, it is a matter of how much an individual is willing to sacrifice where their finances are concerned.