How to Understand Car Insurance Deductibles

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Understanding car insurance deductibles is a must if you're shopping for coverage. (Photo: @KYNASTUDIO via Twenty20)
A car insurance deductible refers to the amount of money a person must pay out of pocket before the insurance company begins paying for repairs or medical bills on a claim. As a general rule, policies with low deductibles have higher premiums, while those with high deductibles have lower premiums. Here’s what you need to know about car insurance deductibles.

How to Choose the Right Deductible

While you cannot predict the future to see if an accident is on the horizon, you can use your disposable income as a guide to choosing the right deductible for your needs.
Step 1: Take your bank statements for the past year and calculate your average balance. To do this, add together the average balance of each month, then divide that number by 12.
Step 2: Add and divide. Add up your bills for the past year and divide that number by 12.
Step 3: Subtract the number in Step 2 from the number in Step 1. This is your average monthly disposable income, or how much is usually left over after paying for the essentials.
Knowing your disposable income helps you to determine how much you can pay on a deductible if you get in an accident. This is a subjective decision. You do not, however, want a deductible that is higher than your disposable income.
  • Tip: It’s more difficult to estimate how much insurance will pay on medical bills because some health issues caused by an accident may be ongoing.
Generally, you pay the deductible and the insurance company pays the remainder up to a certain maximum amount indicated on your policy. If you do not know how much your insurance company can pay toward medical bills, call your insurance agent.

Calculate What You Pay and What Your Insurance Covers After an Accident for Repairs

Step 1: Get an estimate for the cost of repairs to your vehicle. Many insurance companies provide you with mechanics you can call, while others will get this estimate for you themselves.
If the cost of repairs is less than your deductible, you will pay for all of it and the insurance company will pay for nothing. If the repair costs are higher than your deductible, proceed to the next step.
Step 2: Subtract your deductible from the cost to repair your car. The resulting number is how much your insurance company will pay.