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Raise Your Deductible?

It's no secret that insurance has become a pricier proposition over the past few years. The Insurance Information Institute estimated that the average one-year auto policy cost $855 in 2003 and the average annual homeowner's policy cost $603. Average premiums are up 25% and 48%, respectively, since 1999.

Insurance companies consider many factors when determining your premiums, such as your address, age, occupation, habits, and credit score. A lot of these factors are beyond your control, or at least not worth changing to cut insurance costs. (There are more pressing reasons to stop being a chain-smoking tightrope walker in New York City who drives under the influence.) However, there is one variable that is worth investigating: your deductible.

The lower your deductible, the higher your premiums, since there's a greater chance that the insurance company will have to cover a claim. If you have a $100 deductible, and $400 worth of damage is done to your car, the company that provides your auto insurance might be on the hook for $300. However, if you have a $500 deductible, then the company doesn't have to pay a penny.

So how much can you save by raising your deductible? To find out, I visited and got quotes for my family's 1994 Honda Civic and 2000 Dodge Grand Caravan. By increasing the deductible from $100 to $500, the annual premiums dropped approximately $200. If I don't make a claim within two years, I'll at least break even since the savings from lower premiums will compensate for the higher deductible. Beyond two years, I'll come out ahead -- and since I've filed an auto claim just once in my life, I would expect the savings to accumulate.

The difference between a $100 deductible and a $1,000 deductible is not as compelling. That $900 difference in deductible resulted in a lower annual premium of approximately $300, so it would take three years to break even. However, if I don't make a claim for several years, the savings will be even greater.

The other argument for higher deductibles is the wisdom of filing fewer claims. You don't have to search long to find a story of someone who paid premiums for years only to get dropped by the insurance company when a claim gets filed. Unfortunately, that's the way the insurance industry works. Even the number of times you call your insurer is tracked and examined (so don't call unless you really need to).

It's best to use insurance as protection against catastrophic, big-ticket loss. Filing "small" claims (which may not be small to you, but they are to the company) is a sure recipe for higher premiums. Thus, consider the higher deductible and use the savings from the lower premium to build an emergency fund.

To learn more, visit our Insurance Center. For tips on building an emergency fund -- including guidance for finding the best rates -- stop by our Savings Center. And if you have an insurance horror story, tell your tale of woe on the Insurance discussion board.

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