Auto insurance doesn’t cost the same for every driver. You might pay a completely different premium than other drivers that you know. This is because the cost of your insurance premium is based on several factors.
One of the biggest factors is your age. Younger drivers pay higher premiums than older drivers. This is usually because younger drivers are new to the skill and have only recently received their driver’s licenses. On the other hand, older drivers tend to have more experience on the road.
Another factor that affects the size of your premium is your driving record. If you have an accident recorded in your recent driving history, your premium will jump up significantly. The same goes if you have a history of driving infractions, such as driving while intoxicated or speeding.
And another factor that you might not realize affects the size of your auto insurance premium is your deductible.
What Is a Deductible?
Every auto insurance policy comes with a deductible. A deductible is the amount that the policyuser is expected to pay out of pocket when they make an auto insurance claim. Even if the incident is granted 100% coverage through the policy, the user will still have to pay the deductible before receiving a payout from the insurer.
Car insurance deductibles range from $100 to $2500. On average, people tend to choose deductibles that range from $500-$1000 total.
Deductibles aren’t one-time payments. Every time that you file an auto insurance claim, you will have to pay your deductible.
How Does Your Deductible Affect Your Premium?
The size of your deductible will impact the size of your premium. So, if you opt for a lower deductible, you can expect your auto insurance premium to cost more. And if you opt for a higher deductible, your insurer will offer you a lower premium.
Why is that? Choosing a higher deductible mitigates some of the risk for the insurer. You are essentially agreeing to pay more out of pocket in the case that you file a claim. Since you are promising to take on more of the financial risk, your insurer will offer you smaller premium payments.
Should You Increase Your Deductible?
Auto insurance is not a minor category in your budget. According to the Insurance Information Institute, the average cost of auto insurance is $1,588 per year. That’s a lot of money going toward a service that you might not need to use. You may not have any incidents that require you to file an auto insurance claim this year.
So, if you’re feeling the strain of paying your auto insurance premiums, you could contact your insurer and see whether you can increase your deductible. Depending on the size of your deductible increase, this could lower your insurance premium and make the budget category a lot easier to handle. The higher the deductible goes, the lower the premium can drop.
This sounds like the perfect financial plan, right? Well, not entirely. There is a major risk that comes with increasing your auto insurance deductible.
The Risk of Higher Deductibles
Increasing your deductible shouldn’t be a problem, as long as you don’t need to file an insurance claim. If you do need to file a claim, you might find that your higher deductible is too difficult to pay out of pocket.
To make sure that you can afford the deductible at a moment’s notice, you should start building an emergency fund. An emergency fund is a collection of savings meant to help you cover urgent expenses outside of your budget — including a sudden deductible.
What if your emergency fund is too low? If you don’t have enough in your emergency fund, you could apply for a loan by phone. One of the many benefits of a loan by phone is that the application process is simple. It won’t take long to submit your application and soon after you’ll learn about your approval status. With an approved loan, you could use temporary funds to cover an urgent cost in a short amount of time. After the dust has settled, you can focus on a steady repayment plan through a billing cycle.
Increasing your auto insurance comes with a clear financial advantage and a clear risk. Are you willing to take that risk for the sake of savings?