Most types of comprehensive and collision car insurance give you the option of how high your insurance deductible will be. This can vary from zero deductible to very high into the thousands of dollars. In the event of a auto claim, the deductible must be paid before the insurance kicks in and makes a payment on your behalf. Having a lower deductible means that you will have less out-of-pocket costs.
When you have lower insurance deductibles it means that if something happens and you need to file a claim, you will have less out-of-pocket costs than if you had a high deductible insurance. This can be a great benefit especially if one is in a tight financial situation at the time a claim is filed.
In order to pay for the lower out-of-pocket cost, the insurer will ask that you pay a higher monthly premium to make up for their potential loss and risk. In other words, the insurance company will have to pay more of the the claim costs than if you had a higher insurance deductible.
All pros and cons are predicated on risk and reward. Choosing a lower insurance deductible also needs to be based on the risk and potential reward for doing so.
Risks and Rewards
Insurance companies model their business on a "risk-sharing pool". Not everyone is going to have an accident, and the insurance company's business model is based on that. The premiums you pay go into the risk-sharing pool, which is usually invested so that it will grow and further reduce the insurance company's risk. The pool is also used to cover accident claims, and the rest is used to cove business operating expenses such as infrastructure and salaries.
You are sharing risks with all other insured drivers. This allows you to avoid having your entire financial future ruined by one car accident. So, there are rewards and risks for each party. You’re taking a risk to trust the car insurance company to pay for any liability that you have in an accident, and they’re taking a risk that you will have an accident and they’ll need to pay. Both parties get some form of reward, you have the peace if mind that you'll get coverage if something does happen, and the auto insurance company is rewarded by earning money on your premiums.
Auto Insurance Tips
There are some tips that you can use to move into higher deductibles and thus lower your monthly premiums, if you really cannot afford the higher premium now.
- The easiest is to start a savings account. While paying the higher premium and having the lower deductible, open a separate savings account just to save the deductible amount for each type of insurance that you have. For example, if you have a $500 deductible collision insurance, you will need to save that amount in the savings account. Once you save two years of deductibles, you can elect to switch to the higher deductible and hence lowering your premium.
- Re-evaluate your car insurance needs yearly. Take the time each year to talk to your insurance agent about your needs, concerns, and questions. Reviewing and possibly updating your insurance policy once a year is an important part of keeping your payments reasonable and your coverage adequate for your needs.
- Weighing the pros and cons of lower insurance deductibles is something almost everyone has to do when choosing auto insurance products. Understand what deductibles mean and its impact on your premiums, and be honest with yourself about your ability to pay the deductible and the premium. Your budget matters a great deal so that you can work it all out and not get caught in a situation where you cannot .
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