Higher vs. Lower Deductible: What's Right for You?

05/11/2021

Looking to insure your home or vehicle? You may have come across important terms like deductible and premium. While the premium is the monthly payment for your insurance plan, the deductible is the amount you will pay out of pocket before your benefits kick in. The higher your deductible, the lower your premium will be, and vice versa.

When deciding which arrangement works best for you, you should consider factors like your budget, your financial situation and, depending on whether you're buying home or car insurance, the area in which you live as well as your driving record. Let's break down high deductible vs. low deductible below.

High Deductible vs. Low Deductible

Insurance companies charge deductibles to give you an incentive to take reasonable precautions and share the responsibility.

Is it better to have a high or low deductible? That all depends on your financial situation. If your finances are robust enough to pay a higher deductible, you'll get the benefit of a lower monthly insurance bill. This could work out in your favor if you don't think you'll need the maximum amount of coverage to which you're entitled.

Choose a lower deductible, however, and pay less money upfront when disaster strikes. While you won't have to dip as far into your nest egg during an emergency, you will need to allocate enough room in your budget to pay a higher insurance bill. With this type of plan, managing your expenses in times of crisis can be much easier as they are more predictable. You may also benefit from higher coverage limits.

Automobile Insurance Considerations

With vehicle insurance, you only pay a deductible towards comprehensive and collision coverage of your own property. That includes theft, vandalism or accidents in which you are at fault. If you damage someone else's property, however, or injure another person, there's no deductible and your insurance policy will cover the entire cost of their repairs or medical care up to the policy limits—that's called liability coverage.

Deductible amounts may vary between $250 and $1,000. Keep in mind that at-fault incidents can stay on your insurance record for several years, which will increase your premiums, so you may not want to file a claim every time. If you're leasing or financing your car or living on a tight budget, a lower deductible can give you more peace of mind. If you have a clean driving record or live in a low-traffic city, getting a high deductible could save you more money in the long run. At the end of the day, the best option is the one that works for your current financial situation.

Homeowners Insurance Considerations

The same inverse relationship applies when it comes to the deductible and the premium amounts for homeowners insurance. As a homeowner, however, your insurance deductible might be a percentage of your total coverage, a specific dollar amount or a hybrid of the two, depending on the type of claim. As with car insurance, you would only pay a deductible if you file a claim. Because hurricanes, earthquakes and flooding often require additional coverage on top of a standard insurance policy, it's best to inquire with your insurance rep for more information as rules may vary from state to state.

How to Calculate Your Insurance Premium

Your monthly premium isn't exclusively determined by the deductible you choose to pay. There are a few other important factors that insurance companies will take into account, including:

  • The extent of your coverage: The more types of coverage you get, the more your insurance premiums will cost.
  • The value of what you're covering. If you're insuring a million-dollar mansion, your premiums will be higher than for a $300,000 bungalow. Similarly, it will cost more to insure a Ferrari than a Toyota.
  • Your personal history. Additional criteria that may be taken into account include your credit score, driving history, past record of claims, lifestyle, residence and employment.
  • Your age. As a predictor of risk and the likelihood that you'll be filing a claim, your age is an important factor in determining how much you will pay. For instance, a younger driver is usually more expensive to insure than a more experienced driver with a spotless record.
  • Actuarial tables. These mathematical algorithms use your personal and demographic information to determine how likely you might be to file a claim and how much it might cost. Insurance companies use these tables to set your premiums accordingly.

Your insurance needs may vary from one year to the next. To find the product that's best for you, consider getting the help of an independent insurance agent. Connect with us to find your next insurance policy.