What does a deductible mean in car insurance?
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UPDATED: Jul 14, 2021
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Deductibles are used in car insurance for a variety of reasons. While many policyholders might feel that deductibles only benefit the insurance company, there are advantages to the policyholders as well. But, what exactly does a deductible mean in car insurance? To answer this question, it is helpful to know how deductibles work and then policyholders will better understand what deductibles mean in car insurance.
What Is a Deductible?
By definition, a deductible is the portion of the loss the policyholder is financially responsible for. Simply put, if you have a $500 deductible and your damages are $479.28, then your insurance company will not pay anything on the loss. However, if your damages total $3469.01, your insurance company will pay $2969.01 of the damages and you will be responsible for your $500.00 deductible.
Many people view deductibles as financial obligations that basically affect a policy’s premium. With car insurance, the most common use of deductibles is found with physical damage coverages such as comprehensive and collision. The higher the deductible, the lower the premium for these coverages will be. Likewise, the lower the deductible, the higher the premium. Policyholders should choose a deductible that will be one they can afford to pay in the event of a loss.
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The Effect of Deductibles on Policyholder Finances
The effect of deductibles on policyholder finances is certainly advantageous to these insureds. They are able to select the available deductible that minimizes their premium outlay while at the same time representing an amount they feel they can pay if a loss occurs.
This is not the only benefit to the policyholder though. The use of deductibles also helps decrease the loss ratio of the policyholder. The more the policyholder pays out of their pocket, the less the insurer will be required to pay. Insurance companies have profit goals and operating expenses to consider. Policyholders that cost them money are subject to rate increases so, any portion of a loss that a policyholder pays makes that policyholder more profitable for the insurer. This can help keep rates down and also lessens the likelihood of the policy being cancelled.
The Benefit of Deductibles for Insurance Companies
It seems evident that the benefit of deductibles to the insurance company is the fact that deductibles represent the portions of losses that the insurance company does not pay which in turn is better for the bottom line of their financial statements. But, what are the other benefits to insurance companies?
One very important benefit of deductibles for insurers is that having a deductible puts the policyholder in the position of having some “skin in the game”. No one wants to be in a car accident and no one wants to have to pay an unexpected deductible amount. Deductibles can be selected in varying amounts but, whether a deductible is $250 or $1000, policyholders would prefer not to have to pay a deductible.
By mandating deductibles, insurers are effectively creating an inducement for policyholders to drive safely although the policyholders themselves may not realize this.
Another benefit to insurance companies comes from a reduction in claims expense and overhead. There are many situations where vehicles are damaged and it is minor and/or cosmetic. For example, there may be paint transfer to a bumper in an accident where one vehicle strikes another in the rear at a very low speed. The damages may be less than the deductible or the policyholder may not be worried about the paint transfer. For whatever reason, the policyholder may elect not to file for such a small claim. This means that not only will the insurance company not have to pay the claim, they will also not be required to incur the operating expenses of handling a small claim.
When a policyholder is faced with paying a deductible, it is often an expense that they would rather not be paying. However, deductibles do serve purposes for both the policyholder and the insurance company. For policyholders, deductibles provide a means to adjust premiums and to positively affect their loss ratio. For insurance companies, deductibles transfer some of the risk to the policyholder which means that the policyholder has some of their finances at stake as well. In addition, deductibles help lower the claims and operating expenses of insurance companies. In the end, the use of deductibles is beneficial to both parties. If you are unhappy with your deductibles, consider using an online comparison tool to help you find the right policy for the right price. Start comparing car insurance rates now by entering your zip code in our FREE tool below!