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Choosing Higher Auto Insurance Deductibles

Choosing higher auto insurance deductibles is not something most of us do by choice, but rather by necessity. Car insurance can be a hefty investment for any one of us, particularly in these difficult economic times. Trying to keep up with your financial obligations in the face of job loss or compromised income is a challenge. Auto insurance is one area we cannot afford to skimp on or completely forgo. Nevertheless, there are certain options you do have as an auto insurance policy holder to try and save money on your annual premium. One of these options is considering taking on higher deductibles on your policy.

Insurance Policy Deductibles Explained

To fully appreciate this option for saving money on your policy premium, you should have a good basis for understanding. A definition of auto insurance deductibles and an explanation of their purpose is useful in this particular context. In the simplest terms, a deductible is the part you are responsible for. More specifically, an auto insurance deductible is the level of financial cost your claim must exceed before your car insurance carrier will pay out for that claim.

Deductibles are put into place in a car insurance plan for a reason. They limit the number of claim situations by eliminating very small claims. Since the payment for a deductible must be met before a claim is paid, small claims below the threshold of the elected deductible level are non-existent. This helps insurance companies, obviously, but in some ways it helps car insurance policy holders as well. The following section highlights some of the advantages that carrying a car insurance policy with higher deductibles can have for both car insurance consumers and auto policy providers.

Advantages of Higher Auto Deductibles

The advantages for car insurance providers of encouraging the use of higher deductibles in the auto insurance policies of their customers are numerous. For one thing, as stated earlier, a high deductible auto insurance policy discourages smaller claims because the deductible amount has to be met before the coverage limit is tapped into to pay a claim. This factor helps auto insurance companies by reducing the number of claims they have to respond to, thereby also also reducing paperwork and other associated costs. If all auto insurance plans had low deductibles, auto insurance adjusters and claims representatives would be overwhelmed by the number of cases they had to deal with. Since a high percentage of these cases would be so small, the insurer would have to take losses due to their inability to efficiently deal with the claims. In the end, they would have to raise rates to meet the higher demand brought upon by lower deductibles.

This brings our discussion to a related advantage of higher deductible auto insurance plans for car insurance carriers. Since they are not forced to respond to as many claims from their customers, the car insurance carriers themselves actually save on human labor. They are able to effectively meet their customers' needs with a smaller labor force, with less paperwork and generally less bureaucracy. In turn, since they can do their jobs better as protectors of their customers for less money, they are able to pass on this savings to their clientele.

Car insurance policy holders, in turn, save money on their auto policies by electing to take on higher deductible levels in their coverage. Since they are basically surrendering their right to make smaller claims, they are able to secure their policies at a lower rate. This saves them money on equivalent coverage versus a similar policy with a lower deductible. All of this leads to another, similar advantage of taking on higher auto insurance premiums for car policy holders. Since they make their policies more affordable by choosing higher deductibles, they are generally able to afford more coverage with higher limits. In some cases, they can add parts to their policy like collision or comprehensive that they might not otherwise be able to afford at all. Raising their deductible correspondingly raises consumers' ability to insure themselves effectively and take on policies with substantive levels of protection.

The greater ability to get into an affordable policy is the biggest reason most car owners decide to increase their car insurance deductibles. In many cases, drivers choose this option because it is the only way they can afford the car insurance protection they need. For example, in most cases if you have an auto loan or a leased vehicle, you will be obligated by the lien holder to carry comprehensive and collision insurance. This can add hundreds of dollars or more to the cost of your annual car insurance policy premium. For some of us, that extra cost can make that new car purchase untenable. So, in order to make ends meet and make it happen, we choose to carry high deductible collision and comprehensive to cut back on the cost of such coverage.

Higher Deductibles Equal Reduced Coverage

But keeping all of this in mind and remembering the typical reasons drivers choose to increase their auto insurance deductibles, we must also point out that the savings associated with this decision can in some cases be short-lived. To explain this, an example is in order. If you buy that car you can barely afford and you have to carry high deductible collision and comprehensive coverage just to make all the numbers work, and you get into an accident totaling the car, you will be left with a large personal financial obligation on the vehicle.

If you put little or no money down on the car in the first place, chances are you will be upside down in equity if you total it before paying it off. Being upside down means you owe more on the car than it is worth. Depreciation is a nasty thing, especially with newer cars, which depreciate very quickly in the first few years. If you owe more than the car is worth, and you have a high deductible for your collision insurance, you are going to owe in two different ways.

To get the car paid off, you will need more than just the amount of your collision policy, the limit of which is based upon the car's value. And to even get at your collision insurance you will need to pay that high deductible to your insurance carrier. The whole situation can get very expensive very quickly, more than canceling out any money you might have saved on your policy by having a high deductible in the first place. All this must be kept in mind when you are deciding on your policy deductible. You need to have the cash on hand to pay the deductible if a claim situation arises. This factor must be included in your consideration for these sorts of policy decisions.

Choosing higher car insurance deductibles is an effective way to cut down on the policy premiums you have to pay for your automobile insurance. It can help you afford more coverage than you would otherwise be able to pay for. But choosing to take on a higher deductible for your car insurance policy can have potential negative consequences as well.



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