The deductible is the amount or portion of the claim that you pay out of your own pocket. It also relates to the amount of risk you are sharing with the insurance company. If you have a higher deductible you are assuming more of the risk and therefore you decrease your premium. Also, higher deductibles reduce the number of small claims the insurance company must pay. That in turn reduces claims costs which also results in lower premiums.

So how do I figure out how high my deductible should be?

There are several opinions and thought processes on this subject.

Discussion point 1: You should not have a deductible lower than that smallest possible claim. Otherwise you are spending money on insurance coverage you cannot use. For example: small auto collision accidents presently start at about $1000. If you have a $250 collision deductible you are paying for about $750 of coverage, you will never use. (The difference between the deductible and a small accident.) Therefore, your minimum deductible should not be less than the smallest claim you might have.

Discussion point 2: When you raise your deducible to take on more risk and your premium is reduced. But is the reduction in premium worth the increased risk? Here is an example:

Let’s assume you have a $250 auto collision deductible and you are considering raising that to $1000.

If you do this, you will be accepting an additional $750 in risk. Let’s assume the insurance company will reduce your auto premium by $50 per 6 months or $100 per year because you choose a higher deductible. Therefore, you are receiving a $100 benefit for a $750 increase in risk. With that scenario, in 7.5 years you would have about $750 in savings. Therefore 7.5 years would be our breakeven point.  If your accident frequency is greater than one accident every 7.5 years you would be money ahead. So, what would your savings be over an extended period of time? What would happen if you changed your deductible to $1000 and 23 years later you had an accident. In that period of time you would have saved $2300 (assuming no change in insurance rates). Since you took on an extra $750 in risk with a higher deductible, you would subtract $750 from $2300 because you had to pay an extra $750 for the claim. Your savings would be about $1550 dollars by having a higher deductible.

You don’t save a lot of money in the short term by increasing your deductible. The savings are over the long term, when you don’t have a lot of accidents.

What can we take away from this example:  If you have very few if any accidents, a higher deductible will save you money.

Discussion point 3: This thought deals with your financial pain threshold. When some people purchase a car for their teenage children to use, they often purchase an older but dependable car with “experience.”  Let’s say the experienced car costs about $2000 to $3000.  Because it is an older car and because their youthful driver is rated on that car, they may choose to just have liability coverage on the car and no physical damage protection to reduce the premium. They accept the fact that if this car is totaled, they will have to purchase another car. They effectively have a $2000 deductible. What is the difference between a $2000 loss on an old car and $2000 loss on a newer car?  None. It’s still a $2000 loss. The $2000 represents what might be called their “financial pain threshold.” For this family, the $2000 loss would hurt, but would not take bread off the table. So, what is your financial pain threshold? Consider using that to establish your deductible and how much you can save on your premium.

Contact Us today to get a Quote or to Start a Discussion

Call us at 419-874-8055 or

Email us at rhamilton@fireflyagency.com or

Contact us by filling out the Contact Form below.