How your auto insurance deductible affects your premium

You may have heard that raising the deductible on your auto insurance can save you money on your premiums. But what does that really mean? Just what is a deductible and why does it affect the cost of your auto insurance?
When your car is damaged in an accident, your deductible is the amount of money that you have to pay out of pocket before the insurance company's coverage kicks in. Deductibles come into play only when your car is damaged. They apply only to your collision and comprehensive coverage -- not to the liability portion of your auto insurance, which protects you financially when your car causes injuries or property damage to others.
Suppose you had a car damaged in an accident and the estimate for repair was $2,000. If you have a $500 deductible on your policy, the insurer will be responsible for $1,500 of that bill. You'll have to pay the remaining $500. If you have a $1,000 deductible, you'll pay that $1,000 to fix your car and the insurer will pay the remaining $1,000.
You might be tempted to go with the lowest deductible that your insurer offers, but that means you'll pay higher premiums upfront. When insurers know that you're assuming some of the financial risk by agreeing to pay a higher deductible, they reduce the policy premiums.
The savings can be substantial. According to the Insurance Information Institute, raising your deductible is one the best ways to save money on auto insurance. Increasing the amount you pay out of pocket from $200 to $500 can save you as much as 15 percent to 30 percent on your premium. With a deductible of $1,000, you'll pay up to 40 percent less than you would with a policy deductible of $250.
While you don't want a deductible that's too low, you also don't want one that's so high that you can't afford to get your car fixed. So finding the right deductible requires carefully considering your finances. If your car were to be damaged in an accident tomorrow, would you have enough money saved to get it fixed, or could your credit card handle the extra debt?
Farmers Insurance offers an online deductible calculator. Enter the amount of cash you have available, the amount of credit you have available, the amount of money you have left over after you pay bills each month and the current actual cash value of your vehicle. The site then recommends a deductible, which it further modifies depending on the level of risk you're willing to take.
Understanding deductibles can be helpful when it comes to comparing auto insurance policies. To get a true comparison, make sure that the deductible is the same for all the policies that you're considering. That gives you a better idea of each policy's cost.

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