How do auto insurance deductibles work

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In the world of auto insurance, a deductible simply means the amount of money that an insured party covers first before their auto insurance policy covers the rest after an accident.

A deductible is used to share the risk between you and your auto insurance provider. Having a deductible in your policy helps you reduce the premiums you pay but in the event of an accident, you will have to pay the deductible amount. The insurer gets to make a lower payout after an incident but they have to charge you lower premiums for it.

In general, auto insurance deductibles apply to two types of auto insurance:

1. Collision coverage - this type of insurance covers damage to your vehicle when you crash into another vehicle or a stationary object. It only covers damage to your own car in an at-fault accident and not the damage you cause to other people's belongings.

2. Comprehensive coverage - this type of auto insurance covers any damage to your vehicle for all other things that are not covered by collision insurance. This includes things like theft, vandalism, hail, falling objects, and other things.

How deductibles work

When buying auto insurance, your insurance offers you various deductible options, usually from $200 to $1,000. The higher the deductible you choose, the lower your premiums will be.

In the event of an accident, your deductible will be first applied to the damages before the policy kicks in to cover the rest up to the limits. For instance, if your deductible is $500 and you get into a collision that requires $2,000 to repair, you will have to pay the first $500 of the repair costs while the insurance company pays the remaining $1,500. If in the same scenario, the total repair costs were $400, you will cover the full amount as it's lower than the deductible.

When deductibles don't apply

a) When the other driver caused the accident - if you are involved in an accident which you didn't cause, the guilty party's insurance cover will be responsible for the damages.

b) If you choose not to repair the damage - most insurance providers allow you to decide whether or not to repair the vehicle. You won't have to pay the deductible if you choose not to repair. However, the insurance provider will still have to compensate you for the repair costs minus the deductible.

Choosing the right deductible amount

When choosing a perfect deductible amount, you must find the perfect balance between finding a deductible amount that is high enough to reduce your premiums to the desired amount but not too high that you're unable to pay when the accident happens.

The first major consideration is how much you can afford to pay out of pocket comfortably after a crash. The deductible should never exceed the amount you can pay comfortably without messing up your financial situation.

The frequency of your claims is another thing to consider since deductibles are usually paid after every claim.

If you just have some little money saved up or you have limited wiggle room in your income, choose a policy with a low deductible or no deductible at all to reduce your exposure to financial risk.