What Does a Deductible Mean on a Car Insurance Policy?

Consumers should understand the impact of a car insurance deductible.
Consumers should understand the impact of a car insurance deductible. (Image: Jupiterimages/Photos.com/Getty Images)

The amount of an auto insurance deductible is important for a number of reasons. Not only is the deductible an important part of the coverage that an auto insurance policy will provide, but it is also an important determinant of the cost of auto insurance. A consumer should understand how a deductible works and how the it impacts the cost of coverage to determine the amount of deductible that best meets her specific needs.


The deductible is the amount of out-of-pocket costs that an insured person has to pay before the insurance company pays out a benefit. For example, if a driver has a $500 deductible and suffers a covered loss with a total cost of $2,000, the driver must pay the first $500, while the insurance company then pays the remaining $1,500. With auto insurance, the insured party must pay the deductible for each insured event as opposed to health insurance, where the insured party typically must meet the deductible only once per year. Different types of auto insurance coverage may have different deductibles. For example, collision coverage may have a $1,000 while liability coverage may have a $500 deductible.

Impact on Cost

Higher deductibles reduce the risk to the insurance company. This means that insurance policies with higher deductibles cost less than policies with lower deductibles. To determine the amount of savings for a higher deductible, a consumer should ask his insurance agent for price quotes for various deductible amounts. Typical deductible amounts may vary between $100 and $1,000. Moving up in deductible may save the consumer 15 to 40 percent on premium payments.

Claims Activity

Many people are reluctant to make claims on their auto insurance policies due to fear of increased premiums as a result of frequent claims. In fact, the number of auto insurance claims a person makes is one factor that auto insurance companies use when determining a person’s insurance premium. For those who are reluctant to use their auto insurance, raising the deductible may be wise as they are unlikely to make smaller claims and will save money on the cost of the premiums.

Paying the Deductible

Of course, a consumer who raises her auto insurance deductible needs to be able to pay the deductible in the case of an accident. Saving the amount of the deductible and placing that amount in an interest-bearing savings account, or similar account, will help the consumer to have the money when it is needed while still earning a return on the money. Alternatively, the consumer could plan on using a credit card or other quickly obtainable sources of money to cover the costs.

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