Choosing Your Deductible: High or Low?
When deciding on your auto insurance, there are several factors to consider. You have your monthly premium that you have to pay, and you also have your deductible amount that you will pay in the event of an accident. Most people understand the general rule that the higher the deductible you have, the lower your premium will be. For many people, that seems like a great way to save money each month. However, is the decision that easy? Should everyone just select the highest possible deductible in order to save money?
In short, selecting the highest possible deductible amount is not the best option for many people. Keep in mind that whatever amount you select is the amount that you will be required to pay if you get in an accident. While no one thinks they will ever find themself in that situation, the reality is that accidents do happen. If your deductible is $1500, you need to make sure that you have that money to pay in full before the insurance company will cover the rest. Being realistic, you should select an amount that you could pay without putting too much of a strain on your budget or savings account.
Another thing to keep in mind is the amount that your premium will go down as a result of your deductible going up. For some people, the change may be significant and the risk of having the higher deductible may be worth it. However, depending on your auto insurance company, the age of your car, your driving record, and other related factors, you may end up only saving 30 or 40 dollars annually. In this situation, having the higher deductible doesn’t save you much money, and could cost you way more in the long run.
It is important to keep in mind your driving situation when considering your deductible amount. If you drive in an area without much traffic and have a perfect driving record, it would make sense to consider raising your deductible. On the other hand, if you have a history of accidents or live in a big city with a lot of heavy traffic, your risk for getting in an accident is much higher. Therefore, having that higher deductible will most likely only cost you more money than you are saving on your premium.
Selecting your amount of insurance coverage and your deductible amount is no easy decision. When making your choice, consider both your monthly budget and any savings you have that could serve as an “emergency fund.” While it may be tempting to try and save as much as possible month to month, you could end up in a way worse situation where you have to take out a high interest loan in order to pay for damages to your car. Be sure to take the time to consider your situation, weigh the pros and cons of a high deductible, and get quotes from different companies to see which is the best fit for you.
Why did my premium go up?
Beyond requirement by law, we all recognize the value in carrying auto insurance: an appropriate policy could save you thousands in the unfortunate event of an accident. That doesn’t stop most people from sighing a little with each monthly payment, or from being a little miffed when renewal comes around with an unexpected premium increase. The concept of insurance premium is a little abstract – it’s hard to wrap your mind around. While most insurance companies won’t explicitly release every factor that goes into calculating premium or even what those formulas are, there are several key ingredients that are often the culprits of premium increases. Although your insurance agent is always the best source for in depth explanation of rate increases as they apply directly to your policy, below is a brief explanation of some common culprits.
Driver changes. Did you add a new driver? Did somebody have an accident? All of these can have very big impacts on your premium. The current trend in the insurance world is to rate premium on a household, rather than individual, level. Older models would pair one vehicle to one driver under the expectation that each person has their own car that is solely driven by them. So your spouse’s driving record and vehicle would affect only their policy, not yours. This was fairly unrealistic as in most families drivers share cars between them. So now, when a new driver is added to your household, it will often increase the premium for every vehicle on your policy, as each vehicle is now considered ‘higher risk’ by having another driver. The biggest changes are generally seen when added a new, 16 year old driver. Even if your teen has his own car, insurance companies see the potential risk of him occasionally using your car, and will increase the rate across all vehicles accordingly. The same principle applies when one driver in your household has an accident – they are now considered a ‘high risk’ driver who will be rated on every vehicle in the household.
Location changes. Did you move? Zip code is another factor that goes into rate determination. In general, city dwellers can expect a higher premium due to the higher risk of increased traffic. The further you live from the city hub, the lower your risk.
Age changes. Did you have a birthday? We all know that the highest risk drivers are the very young (16-21) and the very old (65+), but what happens in between? Often insureds will be divided into age brackets which are then scaled into highest and lowest risk groups. So it’s possible to see a rate increase when you move from being considered the lowest risk age of one group (age 24 in the group 16-24) to the highest risk age of the next group (age 25 in the group 25-34).
Statewide changes. Insurance is all about shared risk, so unfortunately it’s also common for the premium increase you see to have nothing to do with you personally at all. Sometimes there must be blanket, statewide premium increases to help compensate for high loss frequency and high claims payouts in the state. Fortunately these increases tend to be the smallest when compared to other culprits.
Vehicle changes. Did you pull your convertible out of storage status for the spring and summer months? Buy a new car? Obviously changing a car’s status from storage to active will increase the premium on that vehicle, and a whole other car will certainly see an increase in premium, but sometimes these acts can prompt the entire household to be re-evaluated. What does that mean? It means if your policy renewed before one of those statewide increases discussed above took place, and this re-evaluation is taking place after, you could get hit with the increase in the middle of your 6 month term. Ouch!
There are so many factors that go into the “black box” for determining insurance premium that’s impossible for even the company underwriters to break down every dollar into exact risks. But 95% of the time, if you’re seeing an increase, blame one of the culprits above!