Insurance Deductibles: Sometimes Life Actually IS Fair!

Nov 18, 2008

Let’s talk about a gritty, real-life issue: What should your car’s collision insurance deductible be? The decision is based on pure math, but every one of you can figure this out. And you might save a few bucks! Here’s how:

First of all, a “deductible” is the amount you pay before the insurance kicks in. For example, if your deductible is $500 and your fender replacement costs $1,150 (yeah, I know. . . in your dreams!), then you pay the first $500 and the insurance company pays the remaining $650.

You might save yourself money by raising your deductible. Insurance companies like high deductibles, so they charge lower premiums. For example, suppose the premium for the above collision insurance with a $500 deductible is $630/year, but it’s only $485/year for the $1,000 deductible. What’s the better deal for you?

In this example, you save $145/year. That’s great, as long as you don’t have an accident. Of course, if you do have an accident, you’ll be out an extra $500 because of the higher deductible, wiping out the premium savings, at least for that year. So how do you decide? It’s really simple, but only you can decide. It depends on how safe a driver you think you are. I know a lot of stuff, but I can’t answer that for you.

Suppose you believe that you have about a 20% chance in any one year of having an insurable accident. Put another way, you expect one accident every 5 years. So over those 5 years, you expect to spend $500 more of your own money one time, because of the higher deductible, but you’ll also save $725 in insurance premiums (i.e., $145/year times 5 years). So this is a good deal for you! (Of course, if you think you’ll have an accident every 3 years, it’s not such a good deal – do the math.)

Why does this all work? Because even though everyone is different, insurance companies price for the average customer. Also, all of the players – you, the insurance company, and the bank that made the car loan – have different motivations. What those motivations are is another topic, but you can take advantage of the differences!

So call your insurance company or broker. They’ll be happy to give you some quotes.

“Painting with Numbers” is my effort to get people talking about financial statements and other numbers in ways that we can all understand. I welcome your interest and your feedback.

Purchase your copy of painting with numbers today