Here's Why Dave Ramsey Thinks a High Insurance Deductible Is Often a Better Option

When buying auto insurance, home insurance, or other kinds of insurance coverage, chances are good it will become necessary to decide whether to opt for a high or low deductible.

A deductible is the amount that a policyholder has to spend personally for a covered loss. The insurer picks up the remaining bills once the deductible has been paid out of the policyholder's bank account.

Although a high deductible means a policyholder would have to pay more for a covered loss, it's what finance expert Dave Ramsey recommends. Here's why.

Dave Ramsey suggests opting for a high deductible for a few key reasons

Ramsey believes that, in most situations, a high deductible policy is better than a low deductible policy primarily because of cost.

"A high deductible may sound bad, because you have to pay more up front if you have to file a claim," Ramsey said. "But you'll actually pay lower monthly premiums -- so the longer you go without filing a claim, the more you save."

Ramsey explained that the lower a policyholder's deductible is, the more risk the insurer takes on. And insurance companies charge more for this added risk, because their goal is to make money. If they think they'll have to pay out a larger sum, they have to charge more for a policy.

Ramsey said that as long as a policyholder has an emergency fund, they can cover the costs of the high deductible without a problem if something does go wrong. And, he thinks that taking on this risk personally is worth the savings on insurance premiums that will result.

Is Ramsey right?

Ramsey is right that policyholders do have to pay more to transfer more risk to an insurer. A policy with a lower deductible is more expensive. In fact, a typical driver may save around 30% on their car insurance premiums by upping their deductible for collision and comprehensive insurance coverage from $50 to $250.

In many cases, taking advantage of these savings makes sense. In fact, policyholders can often save enough money in reduced premiums over the course of about a year to cover the deductible. If a policyholder can save $200 on premiums over the course of the year by switching from the $50 to the $250 deductible, that policyholder could simply put the $200 in a bank account to use if a covered event happens and they must file a claim. They'd continue to enjoy premium savings without any added out-of-pocket expenses from there on out.

However, it's important for each policyholder to consider their own individual situation when deciding if a high or low deductible makes sense. Some people would prefer to pay a little more over time to transfer more risk because they aren't prepared to come up with hundreds of dollars if a covered event randomly occurs. If a policyholder would rather pay more in exchange for avoiding surprise expenses, this can make sense.

Ultimately, though, many people should consider following Ramsey's advice and raising their deductible if they have the savings to cover it and don't think a covered loss is likely to occur in the short term.