What is a deductible?

Written by Penny Gusner on January 16, 2013 & Posted in Auto Insurance

When purchasing an auto insurance policy, you quickly will realize you are expected to choose a deductible for certain types of coverages. But how can you choose the right deductible amount unless you understand how deductibles work?

A deductible is simply the amount of money that you personally pay out before your car insurance policy benefits begin to kick in.

Certain coverages, such as uninsured/underinsured motorist and personal injury protection (PIP), can require a deductible, depending upon the options available in your state, and physical damages of collision and comprehensive always will require you to choose a deductible amount, even if it's $0.

An example of how a deductible works, say you've chosen a $500 deductible for your comprehensive coverage. One day you crash into a deer darting across the road, which causes $5,000 worth of damage to your vehicle. You'd make a comprehensive claim and pay $500 out of your own pocket to the mechanic before your car insurance provider would pay the remaining $4,500.

Alternatively, if the deer hit only your side mirror and the repair costs were $400, then you wouldn't make a claim but instead pay the mechanic the full amount out of your own pocket. Anything under the deductible amount is fully yours to pay without bothering your car insurance company.

A deductible is normally paid out to the mechanic fixing your vehicle. However, if the damage to your vehicle is costly enough, your auto insurance provider may instead decide to total out your vehicle. When this is done, your deductible will be subtracted from the amount of the settlement you will receive for the actual cash value of your vehicle (the amount it was worth the moment before the accident).

Choices for deductibles vary depending upon state regulations and then independent rules of car insurance companies; however, in general, they can start at $0 and go up to $2,500. Most car owners choose a deductible for their collision and comprehensive coverage that is in the $250to $1,000 range.

A higher deductible can lower rates and save you money because you are taking on more financial responsibility. A lower deductible will give you higher rates, but less to pay out if you make a claim.

It's important to choose your deductible amounts wisely when you set up your policy. You don't want to choose a deductible that you can't afford if you need to make a claim. And remember, there is always the possibility that you may need to make multiple claims and pay out multiple deductibles within a short period of time.

You can easily get multiple auto insurance rate quotes to see how changing a deductible, higher or lower, would affect your rates, and then make the right decision for your situation. And if your financial situation changes, you're allowed to change your deductible amount choices during your policy period.

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