Car Insurance Premium vs. Deductible: What’s the Difference?

What Is a Premium?

Your premium is the amount you pay to purchase car insurance. In return, the insurer agrees to cover (most of) your losses if you're in an accident or your vehicle is damaged by another covered event.

Insurers typically offer multiple payment options, including monthly, quarterly, semiannually or annually, allowing you to select the one that fits your budget.

Insurers determine premiums based on the types of coverage you buy, your policy limits, the deductible you choose and the risk that you'll file a claim. Companies use factors such as your age, driving record, the car you drive, where you live, how often you drive and more to assess your risk level when setting rates.

To maintain coverage, you must make your payments on time. Otherwise, the insurance company can cancel your policy for nonpayment and leave you without coverage. Because nearly all states require drivers to maintain a minimum amount of liability coverage, you risk fines, license suspension, jail time and other penalties if you drive without insurance.

Tip: Most companies have a grace period during which your policy stays active even if your payments aren't up to date. But if you haven't made a payment by the end of the grace period, the insurer could drop your coverage.

What Is a Deductible?

Your car insurance deductible is the amount you pay out of pocket when filing a claim before your insurance coverage kicks in. After you meet your deductible, the insurance company covers the remaining damages up to the policy limit.

Many, but not all, types of car insurance coverage require policyholders to pay a deductible. Collision, comprehensive, uninsured motorist and personal injury protection (PIP) typically have deductibles, while liability and medical payments (MedPay) coverage usually don't.

Auto insurance has per-incident deductibles, which means you must pay your deductible (if applicable) every time you file a claim.

Here are two examples to help you understand how it works in the real world.

Example 1

You're in a rush to pick up your daughter from soccer practice and rear-end the car in front of you. Because you're at fault, your liability coverage kicks in to cover the other driver's injuries and vehicle repairs. You won't pay a deductible for the liability claim. You will, however, need to pay your deductible for the collision claim you file to cover the cost of repairs to your vehicle.

Example 2

You're headed to work one day when a driver runs a red light and plows into the side of your car. Fortunately, you're not seriously injured. Unfortunately, they don't have insurance, so you'll need to pay the deductible for your uninsured motorist coverage when you get your car repaired.

Six months later, a winter storm rolls through your area, coating trees and power lines with snow and ice. A branch from the tree in your yard snaps under the weight of the ice, falling directly onto the roof of your car. You must pay your comprehensive deductible before your coverage kicks in for repairs.

Tip: If you have more than one deductible, you can choose different amounts for different coverage types.

Why Does Having a Higher Deductible Lower Your Insurance Premiums?

When you opt for a higher deductible, you agree to be responsible for a larger share of potential losses if you need to file a claim. In return, the insurance company generally charges a lower premium since you're reducing its costs in the event of a loss.

But the opposite is also true: If you select a lower deductible, the insurer is responsible for a larger share of the loss, and your premium will be higher.

Is it Better to Have a High or Low Deductible?

Whether a high versus low deductible is better depends on multiple factors, including your financial health and risk tolerance. No matter what amount you choose, you'll make a trade-off. Either pay more upfront with a higher premium or pay more later in out-of-pocket expenses if you need to file a claim.

Here are a few things to consider to help you decide which option is best.

• Your cash reserves: Opting for a higher deductible may make sense if you have a cushy emergency fund. But if you're barely scraping by and wouldn't be able to afford your deductible if you need to file a claim, selecting a lower amount may help protect your finances.
• How much you drive: If your risk of getting into an accident is low because you don't drive much, selecting a higher deductible may be worth the premium savings.
• Your risk tolerance: Lower deductibles reduce your out-of-pocket costs and the risk to your finances when you need to file a claim. If the thought of having to pay $1,000 (or more) out of pocket would keep you up at night, a lower deductible may be a better bet.
• Impact on your premium: Your insurance agent can let you know how much you might save by increasing your deductible. You can decide whether the upfront savings is worth the increased out-of-pocket costs you'd have to pay when filing a claim.

How to Save on Car Insurance

While car insurance may not be a welcome expense, it's a necessary one. Here are a few tips to help you save.

• Shop around regularly. Rates vary by provider. Shopping around and comparing quotes from multiple insurers is one of the best ways to ensure you're getting the lowest available rate for which you can qualify.
• Ask about discounts. Insurance providers offer various discounts to help policyholders save. Common discounts include multipolicy, autopay, safe driving and more.
• Select the right amount of coverage. Being underinsured can cost you if you're in an accident, but being overinsured will cost you every time you pay your premium. Choose coverage types and policy limits that provide the right amount of protection. For example, if you drive an old car with little market value, consider dropping collision and comprehensive coverage.
• Choose the right deductible. Deductibles generally range from $250 to $2,500, and increasing your deductible reduces your premium.
• Improve your credit scores. Many states allow insurers to use credit-based insurance scores when determining your rate. These are different from the scores lenders use but are based on many of the same factors. If your credit has a few dings in it, taking steps to improve your scores may help you qualify for a lower rate.

Learn more: Credit-Based Insurance Scores vs. Credit Scores

The Bottom Line

The deductible amount you choose will affect the cost of coverage. You can reduce your premiums by selecting a higher deductible, but it's important to weigh your ability to pay your deductible with the upfront cost savings you'll receive.

You can use Experian's free auto insurance quote tool to compare rates from multiple providers in one place to help you find a policy that fits your coverage needs and your budget.