An auto insurance deductible is essentially the amount of money you agree to pay out of pocket towards a covered loss before your insurance kicks in. When you purchase auto insurance, you choose a deductible amount – this can be $250, $500, $1000 or more, depending on your policy and your insurer. This deductible applies each time you file a claim. So, for instance, if you have a $500 deductible and you get into an accident that results in $2,000 of damage to your car, you will be responsible for paying the first $500, and your insurance will cover the remaining $1,500.
Deductibles serve multiple purposes in auto insurance. Firstly, they help insurance companies manage risk by ensuring that policyholders have some skin in the game and are thus incentivized to drive more carefully. Secondly, deductibles can help to reduce the number of small, frivolous claims that insurance companies have to process, which in turn helps to keep overall costs down.
When selecting a deductible, there's often a balance to strike between out-of-pocket costs and premiums. Higher deductibles usually mean lower monthly premiums, as the insurance company is assuming less risk. Conversely, a lower deductible means you would pay less in the event of a claim but results in higher premiums because the insurer is assuming more risk. It's important to choose a deductible amount that you can comfortably afford to pay if you were to get into an accident.
Your deductible can significantly impact your premiums. As mentioned above, a higher deductible typically means lower premiums, while a lower deductible usually results in higher premiums. This is because the insurer's risk is directly proportional to the amount they might have to pay out. If they know they won't have to pay until after your deductible has been met, and that deductible is high, they can afford to charge you less in premiums.