Why Paying Less for Auto Insurance Might Come Back to Bite You

Many people are familiar with the concept of deductibles in the context of health insurance. But if you're new to buying auto insurance, you should know that paying a deductible is something that will come into play every time you file a claim against your policy.

A car insurance deductible is a sum of money you'll have to fork over before your insurer pays out on a claim. Progressive says that car insurance deductibles generally range from $100 to $2,000, and that the most common deductible its drivers choose is $500. So if you have a $500 deductible and file a claim for $1,500 worth of car repairs, you'd pay the $500 and your insurance company would cover the remaining $1,000.

Now, you'll often hear that a good way to save money on auto insurance premiums is to choose a higher deductible. And you may be inclined to go that route since your premiums will be due no matter what, but if you don't end up with vehicle damage, you may not have to pay your deductible at all. 

That logic does make sense. But it could also, unfortunately, come back to bite you.

When the insurance numbers don't work out in your favor

Car insurance premiums and deductibles tend to have an inverse relationship -- the higher one is, the lower the other is. You can't get out of paying auto insurance premiums, so you may be inclined to choose a higher deductible to keep your premiums down. But if you get into multiple accidents during the year, or if your vehicle sustains damage on more than one occasion, then you might end up spending more money all in.

U.S. News & World Report says that the average cost of auto insurance in the U.S. is about $1,550 per year. But let's say that premium comes with a $500 deductible. You may be able to whittle that premium down to $1,000 with a $750 deductible. 

In that case, if you were to get into one accident during the year requiring you to file a claim, you'd be spending $1,750. In the other scenario, you'd be spending $2,050. 

But what happens if you end up having to file three claims during the year. Between laying out $750 three times and your $1,000 premium, you're looking at $3,250. On the other hand, if you were to pay a $500 deductible three times a year plus a $1,550 premium, your total costs would be $3,050.

A tough call to make

You might spend less on auto insurance by raising your deductible and lowering your premium -- or not. So one thing to consider when making your choice is your neighborhood. 

If you live in a suburb where parking is abundant, the likelihood of your car getting sideswiped or dinged may be lower. Similarly, if you live in an area that's relatively safe, the chances of your car getting vandalized may be lower. In those cases, you may be less likely to end up having to file claims for damage in a non-moving situation, so it could make sense to go with the higher deductible.

But accidents are a different story, and they can happen anywhere and at any time. So ultimately, choosing your deductible may be a matter of how much risk you personally want to take on. If you get lucky, a higher deductible might save you a lot of money. But if you're unlucky, it could end up costing you big time.