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Choosing Auto Insurance Deductible When Finances are Tight

By Aaron Crowe

Car Deductible SavingsIf you’re on a tight budget and want to drive legally by having auto insurance that covers you in an accident, choosing a high deductible can save you some money in the long run.

Changing from a $500 deductible to a $1,000 one will save 5-10 percent on the premium, says Ryan Scruggs, a Farmers Insurance agent near Phoenix. “It’s not as big as people think,” Sruggs says of the approximate $15 monthly savings for the average consumer.

“It’s not a huge shift unless you have three or four cars on a policy and you bring them all up to a $1,000 deductible,” he says.

Still, it’s money that can be better saved or spent elsewhere, or at least saved to pay the deductible. Saving about $100 over six months of insurance premium payments can be the difference between paying another household bill or not for people trying to save every dollar they can.

A higher deductible cannot only lead to lower insurance premiums, but to fewer claims filed to keep them low.

But there are some things to consider before making such a decision, say insurance and financial experts. Here are some of them:

Do you have $1,000 in the bank?

It would be wise to have the higher deductible amount in a liquidity fund such as a savings account to cover you if you have an accident and have to pay a deductible — which is a specified amount of money an insured person must pay before an insurance company will pay a claim — say the financial experts we talked to .

Deductible amounts are typically in increments set by each state’s insurance department, often set at $100, $250, $500, and $1,000. The higher the deductible, the lower the insurance premium because the insured is taking on more of the risk.

With a low deductible, you’re paying an insurance company more through a premium to protect you in an emergency, which may not be the best use of your money, Hoyt says.

“Is the insurer my best financing option” to cover an emergency?” he asks.

Shanda Sullivan, a certified financial planner, cautions against raising a deductible if you can’t afford to pay it after an accident. At least six months of expenses should be set aside in an emergency fund, Sullivan recommends.

If you do not have a savings account established, start with a $250 deductible, Sullivan says. Once you have at least $1,000 in savings, raise the deductible to $500; at a $3,000 balance, raise the deductible to $1,000, she says.

“It takes a while to build that fund up, so keep your deductible low to avoid reaching for your credit card,” she says.

Charging your deductible?

Drivers who haven’t saved the deductible amount in a savings account and can’t afford to pay it when and if they get into an accident can charge it on a credit card.

“That’s an expensive source of financing,” says Robert Hoyt, a University of Georgia professor who heads the Risk Management and Insurance Program there. That move could work for 30 to 60 days, provided you pay it off as quickly as you can, Hoyt says.

Who really owns your car?

If you’re still making loan payments on your car, then technically the bank owns it and it may not allow you to drop collision coverage. Some lien holders may not allow a borrower to get a high deductible on their vehicle, says Chris Hardy, a certified financial planner in Georgia.

“Always be sure to check with the company that has a loan against the vehicle to make sure it is OK,” Hardy says.

Know your car’s value

A car’s age is a major factor in deciding what type of auto insurance to have and if filing an insurance claim is worthwhile. A car’s value can be looked up on Kelley Blue Book or elsewhere, and generally, car’s drop in value as they age.

Scruggs, the insurance agent, says if a vehicle is 8-10 years old, he recommends checking its value to decide if full coverage is needed. If the car is worth less than the deductible, then having a high deductible makes sense and the owner shouldn’t have full coverage.

“Is my vehicle worth the $1,000 deductible I’m willing to pay for it?” Scruggs asks.

Know the insurance coverage you need

For an older car, dropping collision coverage — which pays to fix or replace your car if it’s damaged or destroyed in an accident — can make sense if the car is worth less than the deductible.

Collision is one area where increasing the deductible makes sense, Hoyt says. Going from $250 to $1,000 can save 20-40 percent on insurance, he says.

“Generally speaking, collision is usually going to be the higher premium component of most people’s insurance policy,” Hoyt says.

Comprehensive coverage — insurance that pays for damage to your car that aren’t caused by a collision, such as fire and theft — should be kept, Hoyt says. However, there isn’t much savings to increasing the deductible for comprehensive coverage, he says.

A low collision deductible and a high comprehensive deductible can lead to some savings, says Maria Townsend, an insurance benefits specialist in Greensboro, N.C.

Liability insurance, which covers damages to another person if you cause an accident, is also worth keeping, Scruggs says.

“I never want anyone to lower their liability at any point,” he says.

Likely to get into accident?

Another consideration is where you live and what type of driving you do, says Townsend, the insurance specialist.

“When finances are tight and you honestly cannot afford a high premium for your auto insurance, you want to make sure you evaluate your everyday life when it comes to driving,” she says.

For example, living in an area with a lot of trees or deer that could hit your car may be worth having a high deductible for collision and a low one for comprehensive, Townsend says.

“That way if anything hits your car you won’t have any issue of trying to afford or pay of $1,000 worth of debt to the insurance company to fix your vehicle,” she says.

People who live or work on a busy street, or commute a lot, have a high chance of getting into an accident and may want a low collision deductible, she says.

When to file a claim

Once you determine the value of your car and get the insurance coverage you need, you’ll know when to file a claim if you get in an accident.

If your car is totaled, you should always file a claim. If it’s damaged and can be repaired, you’ll have to find out if the repair work costs more than the deductible. If the work does cost more than the deductible, then a claim is worthwhile.

One of the worst things to happen, Hoyt says, is to have a $500 collision deductible and an $850 insurance claim. That can leave you unsure if you should make a claim. The low deductible may be giving you a lower premium, which could go up if you file a claim.

Insurance rates won’t increase on your current policy if you file a claim, but they could go up next year at rate renewal time, Hoyt says. Not all insurers raise rates based on claims filed for accidents that weren’t your fault, but past accidents are a strong predictor of future accidents, he says.

Realize what insurance is for

A high deductible often makes sense because it allows you to be covered in a catastrophe, which is the main purpose of insurance.

“Insurance is not meant to be an investment with a return,” says Jeffrey Christakos, a certified financial planner in New Jersey. “It is designed to reduce the financial damage associated with a catastrophic event. It is a safety net.”

Car insurance can cover damages to a car, including total replacement, and injury to participants that includes a range of potential exposures, Christakos says.

“The deductible makes the coverage more affordable,” he says. “The larger the deductible the larger the safety net for most people.”

Filing a claim after every little accident doesn’t make sense, Hoyt says, and isn’t why people should have insurance.

“Insurance is doing its work, whether you have an accident or not,” he says.

People tend to buy relatively low coverage limits with low deductibles so that they’re covered for the minimum required by law without having to pay much money out of their pocket in an emergency, Hoyt says.

They default to a low deductible because “having this stuff (insurance) is only good if I can use it,” he says. The better choice is to use your money elsewhere by having a higher insurance deductible, he says.