Deductibles on your auto insurance are actually not as difficult to understand as you may have thought. As an actuary (someone who prices insurance) I get asked about them all the time.
How do auto deductibles work? If you get in an at-fault accident and make a claim to your insurance company for damage to your car then the company will only pay for the cost of repair in excess of the deductible. If the cost of repair is less than the deductible then the company will pay $0.
Deductibles can work slightly different depending on where you live and your insurance provider. So, it’s best to confirm your understanding with your insurance agent.
What is an auto deductible?
It’s the amount of money that you’ll have to pay out-of-pocket for repairs to your vehicle in the event that you get into an at-fault accident or your vehicle is stolen. If repair or replacement of the vehicle will be more than the deductible, then your insurance company will pay the rest.
How Your Auto Insurance Deductible Works
The primary purpose of a deductible is to lower your insurance premium. Having a deductible reduces the amount that your insurance company would have to pay in the event that your vehicle gets stolen or you get into an at-fault accident. Because of this, they’re able to reduce your premium.
Coverages Where Deductible Applies
Auto insurance policies are split into several different coverages that protect you in different situations. Nationwide has a list of 10+ different possible coverages here, but deductibles are typically only available on the two coverages below.
Collision – this is coverage that will be used in the event that damage is done to your car in an accident with another vehicle or a stationary object.
Comprehensive – this is coverage that will be used if damage is done to your vehicle by anything other than an at-fault accident. This will also be used in the event that your vehicle gets stolen.
So, how much will you end up paying?
In most situations, the deductible is the maximum that you’ll have to pay each time a claim is made under each coverage.
It’s important to note that your auto insurance policy may have multiple coverages with deductibles on each. So in some cases you may end up having to pay two or more deductibles for the same claim.
Let’s look at some examples
Let’s say you have an insurance policy with a deductible of $500 for your collision coverage and $1000 for your comprehensive coverage.
Scenario 1: You’re in an 100% at-fault accident, which means that the accident was caused 100% by you. Repairs to your vehicle will cost $1500.
This will be covered by your collision coverage which has a $500 deductible. So you will have to pay $500 and your insurance company will pay the remaining $1000.
Scenario 2: A tree falls on your car and repairs will cost $2500.
This will be covered by your comprehensive coverage which has a $1000 deductible. You will have to pay $1000 towards the repairs and your insurance company will pay the remaining $1500.
Scenario 3: A vandalist damages your car and repairs will be $400.
This will be covered by your comprehensive coverage which has a $1000 deductible. Since your deductible is more than the cost of repairs, your insurance company won’t pay anything. You will have to pay the $400.
How to Choose Your Deductible
Most insurance companies allow you to choose your deductible, or at least give you several options of what you can set your deductible to. It could be $500, $750, or even $2000 for example.
Generally the higher your deductible is, the lower your insurance premium is going to be. This happens because a higher deductible reduces the amount that your insurance company would have to pay in the event that you make a claim.
You may not want to choose the highest deductible
One very important thing to consider when making this decision is whether or not you’ll be able to afford your deductible in the event of an accident. For many people, a large unexpected deductible payment of maybe $1000 or $2000 may require going into debt to cover.
If an accident does occur and you are unable to pay the deductible you may be without a vehicle. The insurance company will still pay their portion or the repair cost, but if you don’t also pay your deductible then the full repair cannot be completed.
Fortunately you don’t necessarily have to get a full repair. You may be able to reduce the repair cost by getting only the essentials fixed. That way the insurance company’s payment (which will be their portion of the full repair) may be able to cover all or most of the “essentials only” repair. Here’s more info on that.
What deductible is right for you?
There are two things that I recommend you do when choosing your deductible.
1. Ask your insurance agent for premium quotes at several different deductibles, say $500, $750, $1000, and $2000 for all different coverages.
Often time the deductible doesn’t have a substantial impact on the monthly premium. You may decide that the small increase in monthly premiums is worth the large decrease in premium.
2. Decide if you’re willing to drive your car in “less than perfect conditions” (ie only get the essentials fixed) in the event that you make a claim but are unable to pay the deductible.
You may feel comfortable going with a higher deductible if you’re OK with driving your car in “less than perfect conditions”.
In most cases the full repair cost will include some essential repairs and some non-essential repairs. It’s possible that in this situation the insurance company’s portion of the repair cost payment (which is based on full repair) will cover all or most of the essentials-only repair.
When do you have to pay your deductible?
When you pay the deductible depends on what kind of coverage you’re making a claim for.
Collision Coverage (Getting in an Accident)
You will have to pay the deductible on your collision coverage portion of the policy if you get into an accident in which you’re deemed at fault and make a claim for repair costs to your vehicle.
If you are only partially at fault then you may only have to pay a portion of your deductible. The rules regarding this are different depending on the specific insurance company that you’re with.
Note that if you decide to only repair your car to a drivable state (rather than getting it repair back to the condition prior to the accident) then your insurance company’s payment may end of covering the entire cost and you wouldn’t pay your deductible.
The payment of your deductible will be made at the time the repair company requests payment for their work. This is because you’ll be responsible to pay for the entire repair cost and then your insurance company will reimburse you. Sometimes reimbursement to you is made before you have to make the payment for the repairs.
Other times, your insurance company will pay the repair company directly, and you’ll pay the repair company the deductible only.
Comprehensive Coverage (Theft, vandalism, falling objects)
You will have to pay the deductible for comprehensive coverage each time you make a claim against this coverage.
Note that if you decide to only repair your vehicle to a drivable state (rather than getting it repair back to the condition prior to the accident) then your insurance company’s payment may end of covering the entire cost of repairs and you wouldn’t need to pay your deductible.
Below are answers to some common auto insurance deductible questions.
What does it mean when you have a $1000 deductible?
In the event that you make a claim on your car insurance policy, you’ll be responsible for paying up to $1000 towards repair costs. The insurance company will pay the rest. If the repair cost is less than $1000 then you pay the entire cost and insurance pays $0.
Do I have to pay my deductible to fix someone else’s car?
No. You only pay your deductible when you make a claim for repairs to your own vehicle due to an at-fault accident.
How can I avoid paying my car insurance deductible?
Just get the essential repairs made. Your insurance company will pay their portion of the full repair cost (essentials + non-essentials). So, if their portion of the payment exceeds the cost of repairing only the essentials, then you won’t need to pay your deductible.