Insured?

High deductible or high annual premium? Making the right decision

High deductible or high annual premium?

Checking back on the tips given by QuotesChimp, you'll see a reference to the deductible. As a general rule, agreeing to a high deductible reduces your annual premium. So is it a good idea to agree to the maximum deductible and pay the lowest amount of annual premium?

What exactly is insurance?

This is a contract between you and a company which manages a large fund of money. The effect of the contract is to transfer the risk of loss from you to the company. So, if you want to insure against claims being made against you as a careless driver, you pay into the common fund and, should a claim be made, the common fund pays.

Why insure?

Every US state has a financial responsibility law which requires you to prove you can meet any liabilities if you're involved in an accident. In most states, you satisfy this requirement by buying a car insurance policy before you drive on public roads.

Because most people own assets or have savings, insurance protects them from having to pay out of their own pockets. Except, of course, not everyone buys more than the mandated minimum. This leaves them exposed to the risk of being sued if that minimum amount is not enough to meet the claims.

What is the deductible?

This is where you offer to insure a part of the risk out of your own pocket. The more you reduce the risk transferred to the insurer, the lower the annual premium.

Why is this a good idea?

On average, an experienced driver will drive not less than five years without an accident. So if you are self-insuring a part of the risk, you will save money in all the years where you avoid a claim. If you have savings, you can add all the money saved on annual premium payments to that fund and get a good return. Over time, it will be easy to build up more than enough to cover the deductible payment should an accident occur.

Why is this a bad idea?

Because when you might have an accident is not predictable. Some people are lucky and drive a lifetime without a claim. Others are unlucky and have several accidents close together. Suddenly having to find a large cash sum at short notice might strain your family budget. Here are some questions to help you think through the issues:

    » if you had an accident tomorrow, could you afford to write a check for the amount of the deductible?

    » if not, where would the money come from and what would it cost you, e.g. interest payments on a credit card?

    » would it be better to drive a make and model that's easier and cheaper to repair, i.e. will be average repair be within the deductible and so avoid a claim on the insurer?

When you are buying collision and comprehensive cover, you'll be required to select the amount of the deductible. Get multiple quotes for low, medium and high deductibles, and decide which looks the best value. It may well be that not driving an expensive car pays off with lower premiums when you accept a high deductible. Do the sums and find out which car insurance quotes give you the right amount of cover with the right deductible for your needs.