How Do Deductibles Affect Car Insurance Premiums?

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The deductible on your car insurance premium is how much you must pay out of pocket before the insurance can begin payment on a claim. Typically, the relationship between the amount of the deductible and the amount of the premium is inversely proportional. In other words, a high deductible usually comes with a low premium and vice versa. There are two key factors to consider when trying to understand the relationship between deductibles and premiums in relation to your needs - acceptable risk and disposable income.

How much risk you can accept

While there is not an exact science to calculating how much you want to risk in terms of your car, finances, and personal safety, there is a general system that may help in your decisions about car insurance deductible and premium.
  • Step 1: Add up how many car accidents you have been involved in as a driver, regardless of who was at fault.
  • Step 2: Subtract the age you began driving from your actual age to determine how many years you have been driving. If you have been driving less than 18 years and have had more than one accident, you are more accident-prone than the average driver and may want to pay a higher premium to have a lower deductible. If you have been driving 18 years or over, continue to step 3.
  • Step 3: Divide the years you have been driving by the number of accidents you have had. If that number is less than 18, you have had more than the average number of fender benders than other drivers and may want a lower deductible.
If that number is 18 or above, you have had fewer accidents than the average person and may be able to risk a higher deductible.

How much you can pay out of pocket

If you have a substantial amount in savings, calculating your average monthly disposable income may not be necessary. Deciding whether you want to pay higher premiums or higher deductibles is then a matter of personal choice. If your savings, however, are nonexistent or sparse, take the following steps to estimate how much of a deductible you can afford in the case of an accident.
  • Step 1: Add up your income for the past year from your paycheck stubs or deposits on your bank account, then divide that number by 12.
  • Step 2: Add together all of your expenses for the past year and then divide that number by 12.
  • Step 3: Subtract the number in Step 2 from Step 1 to determine your average monthly disposable income, or how much remains after paying the bills.
  • Step 4: If possible, avoid having a deductible that exceeds your monthly disposable income. That way, if you do have an accident, you won’t be facing financial disaster. If there is ample disposable income, you may be able to afford a higher deductible and lower premium.
Deciding on the amount of your deductible is a subjective process, but assessing your risk and finances can serve as a guided. There is more than deciding on a deductible amount to garnering the best insurance premium rate, however. Staying informed on the best rates around takes time and effort.

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