How Raising Your Car Insurance Deductible Can Actually Save You Money

Sep 26, 2014 03:54 PM EDT | Matt Mercuro


Think you're paying too much for auto insurance? There's a chance you might be able to lower your cost by raising your deductible, according to a new study.

A study released by Quadrant Information Services, and commissioned by, showed how auto insurance premiums go up or down when consumers change their deductibles from $250 to $500 and from $500 to $1,000 or $2,000.

Americans can gain big savings of approximately 9 percent on their car insurance premium by increasing their deductible from $500 to $1,000.

Increasing the deductible from $500 to $2000 will bring the average US savings up to 16 percent, according to the study.

What is an auto insurance deductible?

An auto insurance deductible is the amount of money a policyholder pays on an insurance claim before coverage "kicks in," says Bob Passmore, senior director of personal lines policy for the Property Casualty Insurers Association of America(PCI), according to an press release.

A normal auto insurance policy is made up of three parts: collision, comprehensive, and liability. There is no deductible on the liability portion of your policy, which is mandatory in almost every state and pays to fix another driver's vehicle when you were the reason an accident occurred.

There are separate deductibles on collision and comprehensive insurance however.

Collision insurance pays to fix your own car after a crash and comprehensive insurance pays to fix your own car after damage caused by incidents like falling tree branches or a collision with deer.

The survey looked at the combined average of collision and comprehensive deductibles.

Best and worst states for higher deductible savings:

How much money a person can save depends on where they live.

The largest increase can be found in Massachusetts, where the average increases to 19 percent when the deductible is increased from $500 to $1000, according to the study.

Other states that offer savings to their drivers for choosing a larger deductible are:

-South Dakota(14%)

-Kansas (13%)

-Wyoming (13%)

-Iowa (13%)

"It's very interesting to see that in some states raising your deductible gives you a huge savings and in others it barely moves the needle," said Laura Adams, senior analyst, in a statement.

The smallest differences were recorded in places like:

-Michigan (4%)

-Florida (5%)

-Louisiana (6%)

-North Carolina(6%)

-Nevada (6%)

"In some states, you can save hundreds of dollars each year by signing up for a higher deductible, but in others, the reward is so small that it doesn't make sense to risk the higher deductible. This is a good reminder that doing a little research and knowing what's available to you can really pay off in the long run," said Adams.

So what should you do?

Here are five tips to consider when trying to decide if increasing your deductible:

1. Look at your finances:

"You need to think: What can I afford to pay out of pocket?" Passmore says. "For some people that might be $100. For others, it might be $1,000.

2. Consider other factors:

The lower the value of your car, the lower your collision deductible should be, if you decide to carry collision coverage at all, Troy Thompson, an independent agent and principle of Pinnacle Insurance Agency of Minnesota, said according to the release.

So make sure to figure out how much your car is worth before doing anything.

3. Vanishing Deductibles exists:

A number of companies offer "vanishing deductibles," in which your deductible is reduced every year that you don't have an accident.

But be careful. You'll usually pay more in premiums to get the vanishing deductible, according to Thompson.

4. Bank your savings:

If you choose to raise your deductible, it's wise to put your premium savings into a savings account until you reach the amount of your deductible.

"That way, you'll have money when you need it," Thompson said.

5. Figure out how much you'll save:

Thompson recommends meeting with an independent agent and figuring out how much you'd actually save in certain scenarios.

For example, if raising your deductible from $500 to $1,000 would save you $500 a year, then you'd make up the cost of the deductible in one year.

"If you didn't get into an accident that year, you'd be making money on the deal," he says.

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