When a High Insurance Deductible Could Backfire
by Christy Bieber | Published on Oct. 11, 2021
Consider this when you decide on the size of an insurance deductible.
Insurance policies should provide coverage in case of losses. For example, a driver who buys collision coverage and gets into an accident doesn't usually need to pay for fixing or replacing the car. Insurance usually covers the costs, up to policy limits.
When you buy insurance, however, you make choices about the amount of coverage you want. This includes not only deciding what types of insurance to get, but also how much you are willing to pay out-of-pocket in the event of a covered loss. The amount the policyholder must pay before the insurer reimburses additional damages is called the deductible.
Often, it's tempting to choose a high deductible, which could be as much as $1,000 or more. That's because insurance policies with a high deductible have lower monthly premiums, so they seem more affordable on the surface. However, there are times when a high insurance deductible can backfire. Here's how this could happen.
How a high deductible can backfire
A high insurance deductible could backfire if a policyholder focused only on premium savings and didn’t plan for what would happen in the event of a covered loss.
If something goes wrong, the policyholder has to cover the deductible. Say, for example, a collision occurs and the car sustains $5,000 worth of damage. If the policyholder chose a $2,500 deductible, the car insurance company only pays for $2,500 of the $5,000 in losses. The policyholder pays the other $2,500 to get the car up and running.
This could be a huge issue if the policyholder doesn't have $2,500 to pay for repairs. That could mean choosing between borrowing $2,500 -- and potentially paying a very high interest rate -- or waiting to fix the car until enough money has been saved. This could be impossible if they need the vehicle to get to work or to school.
When a deductible is too high, it also often undermines the need to make an insurance claim at all -- especially since insurance premiums tend to go up after a claim. For example, if the driver with the $2,500 deductible sustains only $3,000 in damage, it may not be worth using insurance to only get $500 of coverage when their car insurance premiums would be higher for years after a covered crash.
While this decision would make financial sense, it would leave the insured driver needing to come up with even more money out of pocket -- and they wouldn't get the benefit of the protection insurance is supposed to offer.
Ultimately, when buying insurance, policyholders should carefully consider the amount they can afford to spend on covered losses -- and the amount of their own money they are willing to risk. These decisions should determine the size of the deductible for every insurance policy.
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