Can I Make My Deductible Vanish?
Consumers, and that means advertisements for the insurance carriers, are focused on reducing premiums and avoiding large out of pocket expense. Nobody likes the idea, as represented in one of the TV ads, of a large deductible hanging over their head, so "Vanishing" deductibles has wonderful ad appeal, but is it realistic and financially sound?
How Do Deductibles and Premiums Relate?
Historically, the equation was simple, carry a high deductible and the insurance company would lower your premiums. The rationale for this was every insurance carrier's favorite topic: Risk. The insurance carriers figured out that if you carried a higher deductible (which went toward claims that the carrier paid), they could afford to reduce your premiums, based on less out of pocket expenses for them and the increased value of the money (interest) they could earn by not paying it out. The sales pitch was usually based on a conversation about shared risk; you took the risk of the going out of pocket, they took the risk of offering you lower premiums. Either way, kind of like Vegas, the numbers worked out for the insurance company. It was really about your tolerance for higher out of pocket vs. lower payments.
- You have an auto policy with a $500 Deductible and you pay $700 annually for your coverage
- Raising your deductible to $1000 can save you as much as 15%
- That is $105 dollars per year; if you don't have an accident, after tax money in your pocket
So What Are Vanishing or Disappearing Deductibles?
Many insurance carriers, notably Allstate and Nationwide, have been flooding the consumer market with promises of lowering and eliminating deductibles, while maintaining premiums and coverage. What's the old proverb about something that sounds too good to be true? Like most things, be sure to read the fine print and do the math.
The advertisements make it sound like this is just a free option they grant out of the kindness of their corporate souls. Corporate souls, especially those inhabiting an insurance company, don't generally exude kindness. Here is the catch.
How the deductible programs generally work; when you sign up:
- Earn a $100 deductible credit immediately
- The credit applies to both comprehensive and collision
- Every year you remain accident and major violation free, with no policy lapses, you will receive an additional $100 credit (maximum of $500 credit)
- Claims will automatically be settled using the deductible credit and the deductible credit will be reset to $100. It has no cash value and the entire credit will be used in the event of a claim. You do not get to choose when to use your deductible credit, it is not bankable
- As long as the feature is active, the diminishing deductible credit will never go below $100. If the feature is removed; the earned credit is reset to $0.
The benefits to you are immediate, and not unsubstantial. You will receive:
- Reduced out of pocket expenses - you will always have at least $100 deductible credit
- Loyalty and safe driving will result in additional deductible savings
- Opportunity to select higher deductibles and save on premiums
But the Benefits are Not Free or Automatic
You have to request the coverage, and there will be a fee added to your monthly bill. The amount of the coverage will vary, based on how many vehicles are covered, how many drivers and some other factors. In general, you will pay $5 per vehicle per month for the first vehicle and $10 for each additional vehicle, so do the math.
- If you pay $5 per month for 12 months, in the first year you just paid $60 for a $100 credit that may or may not be used, based on what claims you end up making. The credit can only be used against deductibles on valid claims.
This isn't really that great an option. It plays to the fixation people have on not paying out of pocket, unbudgeted expenses. If you self-insure your deductible by saving the $500, even in a simple saving account, you will always come out ahead the interest, it is just math. So this option really only makes sense if you struggle with the discipline to save money and plan ahead.
Check Your State's Regulations
Several states have specific regulations governing the way deductible reduction programs are administered, and California recently discontinued them due to customer complaints. For example, New York has a completely different set of regulations compared to most other Northeastern states.
While Nationwide and Allstate created the market and have dominated the airwaves with their aggressive advertising, many other local and national companies have instituted changes to their policies to compete, such as Hartford Insurance.