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How Do Car Insurance Deductibles Work? 

The Baldwin Group
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Updated: March 26, 2025
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5 minute read

When it comes to safeguarding your vehicle with car insurance, the decision about your deductible is critical. Striking the right balance between a high and low deductible involves carefully considering several factors.  

Before we dig into the pros and cons of car insurance deductibles, let’s examine what a deductible actually entails. 

Understanding how deductibles work 

A deductible is essentially a predetermined amount of money that you, as a car insurance policyholder, agree to pay out of your own pocket before your insurance coverage comes into play. It’s a form of self-insurance requiring you to contribute a specified sum towards the cost of repairing or replacing your vehicle in the event of an accident. 

Imagine you’re involved in a car accident, and the repair cost is $2,000. If your insurance policy has a deductible of $500, you’d be responsible for covering the initial $500 of the repair bill. Then, your insurance coverage kicks in to take care of the remaining $1500 of covered expenses. 

What is the purpose of a deductible? 

One of the main reasons a deductible is part of the policy is that you share the financial risk with the insurance company. If policyholders are required to contribute a specified amount, insurance providers feel that you’ll be a safer driver—and potentially have fewer claims. 

What impact does a deductible have on premiums? 

Generally, the higher your deductible, the lower your monthly premiums will be. This inverse relationship is based on the principle that if you’re willing to cover a larger portion of the potential costs, the insurer can afford to charge you lower monthly premiums. 

Are all deductibles the same? 

Different coverage types within your insurance policy may have separate deductibles. For example, if your policy includes both collision and comprehensive coverage, each might have its own deductible. It’s important to be aware of these distinctions and how they can affect your personal budgeting. 

High annual deductibles: Putting you in control 

The rationale here is simple—the higher the deductible you’re willing to shoulder, the less financial risk the insurance company has to bear, resulting in lower monthly costs for you. 

While it’s a choice that allows cautious drivers to take control of their insurance costs, the trade-off is higher out-of-pocket expenses in the event of an accident.  

These are the benefits of choosing a higher deductible: 

  • You might get lower premiums: The most apparent advantage of choosing a high deductible is the lower monthly premiums. Opting for a $1,000 deductible instead of the more typical $500 could translate into a substantial monthly saving on your insurance premiums.  
  • Two thumbs up for responsible drivers: Opting for a high deductible might make sense if you have a clean record. You’re essentially banking on your ability to avoid situations that would require frequent claims, so you won’t need ever to pay that high deductible. 

But there are risks when choosing a higher deductible: 

  • Consider the financial drain: Imagine you’re suddenly responsible for covering a significant chunk of auto repair or event-related medical expenses out-of-pocket. Because accidents are unexpected, your emergency fund may not have enough to cover your deductible. 
  • Be careful of underinsuring: Choosing a high deductible might tempt you to skimp on coverage to keep premiums low. But if you’re then involved in a severe accident, the combination of the high deductible and minimal coverage could leave you underinsured — especially if medical expenses are involved. 

Low annual deductibles: A safety net with trade-offs 

Opting for a low deductible in car insurance means you’re choosing to have immediate financial assistance from your insurance provider in the event of a claim. While it provides a safety net, be aware of the potential trade-offs, like even higher premiums when your policy renews.  

These are the benefits of choosing a lower deductible: 

  • Coverage kicks in fast: Using the example cited above, where your deductible is $500. With a repair bill of $2,000, you’re only paying the initial $500 before the insurance kicks in to cover the rest. Having immediate coverage is priceless when fast access to funds is needed. 
  • Lower out-of-pocket costs offer more reassurance: Many drivers worry about quickly scraping together a substantial sum in the event of an auto accident. Low deductibles offer reassurance for drivers who don’t want to be caught off guard by the added stress of significant out-of-pocket expenses. 

There are also risks when choosing a lower deductible: 

  • Your monthly premiums might be higher than you’d like: Low deductibles come with a trade-off: while it provides the convenience of lower out-of-pocket expenses, the insurance provider must offset the increased financial risk of immediate coverage by charging higher monthly premiums. 
  • There’s the potential of overpaying: Consistently paying high premiums for a low deductible may lead to overpaying for seldom-used coverage. A cautious driver with no accidents might find that the accumulated expense of high premiums outweighs the benefits of a low deductible, especially if claims are rare. 

3 things to consider when choosing a car insurance deductible 

  1. Financial stability: 
    Check your financial situation first. If you’ve got a solid emergency fund and can handle a higher deductible without stressing your finances, it’s worth thinking about. Imagine having a $2,000 emergency fund—it could make managing a $1,000 deductible much easier. 
  2. Driving habits: 
    Think about how you drive. A lower deductible could give you more reassurance if you’ve had a few fender-benders or live where the weather gets wild. For instance, drivers in snowy regions that see a lot of minor winter collisions might feel better with a lower deductible. 
  3. Car value: 
    Think about what your wheels are worth. If you have an old car worth $5000 or less, it does not make sense to have a $2000 deductible. Unless you can save significantly on your premium cost with a higher deductible, it usually makes sense to go low — unless you drive a newer-model car. 

So, will you go high or low? 

Picking a deductible isn’t a one-size-fits-all deal with car insurance. It’s about sizing up your money situation, how you drive, and how much risk you’re comfortable with. Know the upsides and downsides of going high or low, and you’ll be all set to make a choice that keeps your wallet happy and gives you the reassurance you need. 

That’s where we can help. The Baldwin Group makes it easy to get the right policy with the right deductible. All we need is a little information to get started. Then, we’ll show you personalized quote options that fit your current needs and budget. Click here to begin

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