In theory, insurance is the easiest of contracts to understand. You pay a premium and, if you incur a loss listed by the policy, you put in a claim and recover the relevant amount of cash. You should find this a fair exchange because, in return for a relatively small amount of money, you can claim a lot more back. This works because a large group shares the total cost of loss. When you share between tens of thousands, the premium rates come right down. As an aside, that’s why the failure to enforce the mandatory liability minimum is so frustrating. In some states, up to 20% of all the drivers on the road are uninsured. If they were all forced to contribute, everyone’s premium rates would fall. Anyway, back to the real world, the effect of insurance is to transfer personal risk to the group. Taking a realistic view of the world, that’s the best place for the risk to be.
So what’s a deductible? This reverses the usual effect of an insurance policy because now you are agreeing to insure yourself for the first part of every claim. In straightforward language, this self-insurance lets the insurer off the hook because the majority of claims are for relatively small sums of money. Let’s say, for example, you agree to a deductible of $500. You know you will be hit with a premium rate increase of you make a claim. So suppose you have an accident and the cost of repairs is $600, are you going to claim? Think of it this way. The actual amount you are going to claim from the insurer is $100 but the odds favor a premium rate increase of rather more than that. Most people calculate it’s cheaper to pay more than the deductible to settle the claim and avoid rate increases.
Now let’s up the deductible to the usual maximum of $1,000. This justifies the largest discount so, as long as your luck holds, you have the cheapest possible premium rate. Have you only liability insurance? If so, you are going to need the $1,000 for your insurer and enough money to repair or replace your own vehicle. This assumes you were not injured or carry health cover for treatment. Otherwise, there may be medical expenses to find as well. This can hit your family budget really hard but, if your luck holds, most people can get through it. In the worst case scenario, however, you have another accident a few months later. Now this is really asking you questions about your savings and ability to raise cash in a hurry.
So here’s your chance to be wise before the event. Say you save 10% on your annual premium if you agree to pay the first $1,000. Which is better? To pay the 10% and give up the deductible, or run the risk of having to find $1,000? Get different car insurance quotes to see the difference in premium rates. Unless you have enjoyed years of trouble-free driving and are absolutely confident of no claims, it may be better to struggle with the higher premium for peace of mind. Of course it all comes down to what you can afford. Do the math on the car insurance quotes and see which is best.