How Does a Car Insurance Deductible Work?

Man next to a broken down car

When you file a claim with your car insurance provider, you may have to pay a deductible. This is the amount you pay out of pocket before your insurance coverage kicks in.

Not all coverage types require a deductible, but those that do allow you to decide what the amounts will be—and that will have an effect your insurance policy's monthly payment. If you're purchasing a new auto insurance policy, filing a claim or simply want to evaluate your existing policy, here's what you need to know.

What Is a Car Insurance Deductible?

If you have health insurance, you've probably dealt with deductibles before. Essentially, it's what you are required to pay out of pocket when you file a claim, until you reach your deductible amount. But unlike health insurance, with auto insurance you don't have a deductible that resets every year. Instead, you're liable for your deductible amount every time you file a claim.

As an example, let's say you cause a car accident, and the total damage to your vehicle is $10,000. If you have a $1,000 deductible, you'll need to pay that amount, then your insurer will cover the remaining $9,000. If your car is totaled and the insurer cuts you a check for the value of the vehicle, it'll be reduced by that $1,000 deductible.

Insurers offer a wide range of deductible options, usually from $0 to around $2,500. Some car insurance companies may also provide features that reduce your deductible over time. Some insurers may drop your deductible by a set amount—say, $100—for every year that you're accident-free.

Other insurers may allow you to pay into what's called a deductible fund. For example, you pay $30 in exchange for a $100 decrease in your deductible annually.

The deductible you choose will impact your car insurance premium (the amount you pay for your policy). Opting for a higher deductible reduces the insurance provider's cost if you file a claim, so you'll pay a lower premium. In contrast, a lower deductible reduces your out-of-pocket costs if you have a claim, but will result in a higher rate.

If you're getting car insurance quotes from different providers, you can try different deductibles to see how your rate is impacted. You can also do this with existing coverage through your online account.

What Kinds of Auto Insurance Coverage Require a Deductible?

Deductibles are most common with collision and comprehensive coverage. In some states, however, you may also have a deductible for personal injury protection or uninsured/underinsured motorist property damage coverage.

  • Collision coverage: If you strike another vehicle or an object, collision coverage will help pay for repairs. Deductibles are standard for this type of coverage and can vary by insurer.
  • Comprehensive coverage: If your vehicle is damaged by hail, fire, falling objects, collision with an animal or something similar, you'll file a comprehensive coverage claim. Deductibles are standard for this type of coverage and also vary by insurer.
  • Personal injury protection: Also known as PIP, this coverage pays medical bills, funeral expenses, child care expenses, lost wages and other similar expenses, regardless of who caused the accident. PIP is not available in all states and where it is available, it may be required or optional. Also, not all states that mandate PIP also require a deductible.
  • Uninsured/underinsured motorist property damage coverage: If you're involved in an accident and the other driver is at fault, but they either don't have enough coverage to pay your property damage expenses or they're not insured at all, this coverage will kick in. Depending on where you live, you may or may not be required to get this coverage. Deductible requirements can also vary by state.

If you're not sure what's required where you live and what to expect, contact your state insurance department to get the correct details.

What to Consider When Choosing Your Auto Insurance Deductible

Picking a deductible for your auto insurance policy can be a stressful experience. If you go too low, you could end up paying a higher premium. But if you go too high, it could be financially devastating if you have to file a claim.

To help you make the right choice for you, here are some things to consider:

  • Your emergency fund: A large emergency fund may allow you to afford a big deductible, which could help you save on monthly insurance costs. If you don't have a big buffer, though, you may want to opt for a lower deductible.
  • Your lender: If you've financed your vehicle, your lender may require certain types of coverage and limits on deductible amounts. So while you may be able to afford a higher deductible, your lender may not allow it.
  • The risk of getting in an accident: If you've gotten in several accidents in the recent past, you could be at a higher risk of getting in another one, and a lower deductible may be a better option. Also, consider where you live—people in urban areas are more likely to get in an accident than people in rural areas because traffic is more prevalent.
  • The value of your vehicle: If your car is only worth a couple thousand dollars, you may question whether you need collision or comprehensive insurance, along with their deductibles, at all.

There's no one-size-fits-all solution for everybody, so it's important to consider these factors and other aspects of your situation to choose the right deductible for you.

Other Ways to Save on Car Insurance

Choosing the right deductible can give you a good balance between saving on your monthly rate and the amount you owe when you file a claim. But it's not the only way to have some control over your car insurance rates.

Other ways to save on car insurance include:

  • Shopping around and comparing quotes from multiple insurers
  • Applying discounts that you qualify for
  • Making changes to coverage amounts
  • Improving your credit score

Insurance companies in most states use your credit report to create what's called a credit-based insurance score. They then use this score to help determine your rate. By monitoring your credit and taking steps to address potential issues, you could improve your chances of scoring lower insurance rates.