Should You Raise Your Car Insurance Deductibles? Here's What to Think About First

When you sign up for auto insurance, you typically have to maintain a minimum amount of coverage designated by the state where you live. And in most cases, the minimum amount of coverage isn't nearly enough to make sure you're truly protected in the event you're found responsible for an accident or are hit by an underinsured motorist. Plus, the minimum coverage doesn't typically cover damage to your own vehicle, and this is something that most drivers should have.

While it's usually not a good idea to skimp on insurance coverage, one area where you have some flexibility with your car insurance is your deductible on collision and comprehensive insurance.

If you aren't familiar with the term, your deductible is the amount you'll need to pay before your insurance company pays for a claim. As an example, if you're found to be at fault for an accident with $5,000 in property damage and you have a $500 deductible, you'll have to pay $500, and your insurer will pay the remaining $4,500.

In simple terms, a higher deductible gives you more skin in the game, and it reduces the likelihood your auto insurance company will need to make a big payout on your behalf. Common deductibles in auto insurance policies are $250, $500, and $1,000, although others are certainly possible.

Reasons you might want a higher deductible

The most obvious reason to consider a higher deductible is to save money on your auto insurance costs. According to insurance giant Progressive, switching your collision deductible from $500 to $1,000 can lower your premium by about 28%.

Beyond the cost savings, a higher deductible can make sense if you have a particularly safe driving record. An accident-free past doesn't guarantee the same in the future, however, and of course you can't predict when someone will hit your car, when a tree branch will fall on it, etc.

Reasons to think twice

There are a couple of key considerations that could make a higher deductible a less-than-ideal way to save some money. If you're a newer driver, or don't exactly have an excellent driver safety record, you might be better off leaving your deductible where it is.

Financially, you want to make sure that (at a minimum) you have enough money in an emergency fund to cover your entire deductible if you get in an accident. You certainly don't want to have to tap into retirement savings or charge your credit card if you are on the hook financially for an accident.

If you choose to raise your deductible, you're always rolling the dice to one extent or another. Taking the chance doesn't make a whole lot of sense if you aren't prepared for the potential impact if things don't work out in your favor.

There's no way to know for sure what the best move will be

Of course, nobody has a crystal ball that can tell you if and when you're going to get into an accident, and what the financial implications will be. Therefore, there's no way to know which decision will be the best one.

Think of it this way -- if you decide to keep your deductible low and end up with no accidents for years, you might feel as if it was a wasted opportunity to save some money. On the other hand, if you raise your deductible from $500 to $1,000 and cause an accident, you'll wish you hadn't done that.

The bottom line is that there are several factors you should consider when assessing your car insurance deductible. If you have a safe driving record, want to minimize your monthly expenses, and (most importantly) would be able to absorb a higher cost in the event of an accident, raising your deductible could be a smart idea. But if all those things aren't true, it could be a better idea to leave it alone.