Deductibles, endorsements, coverages…there are many insurance terms to familiarize yourself with – and you should. Knowing how your auto insurance works might be the difference between being able to make well-informed financial decisions and making poor choices because of a lack of knowledge.
What is a deductible?
A deductible is the amount of money you must pay out of pocket when you file a claim. An insurance policy is there to pay for the damages you might incur in the event of an accident – but it does not always cover all of those damages. When you are at fault in an accident and the damages caused belong to your vehicle, you have to pay a deductible.
How car insurance deductibles work
Picture this scenario.
You are at fault in an accident with another car and your vehicle is damaged. The repairs on your vehicle are valued at $5,000 and require an insurance claim. Your deductible is $500. This means you will be required to personally pay $500 out of your own pocket, and the remaining amount of $4,500 is paid by your insurance company.
Collision coverage deductibles
Collision coverage addresses damages to your car in the event of a car accident. In Ontario, the typical deductible for collision insurance coverage is $500 or $1,000. You may either be required to pay the full deductible amount (if you are at fault for the accident) or a partial amount (if you are only partially at fault for the accident).
Comprehensive coverage deductibles
Comprehensive coverage addresses damages to your car in the event that it was damaged while parked (i.e. fire, theft, vandalism, water damage, etc). The standard deductible amount for comprehensive coverage in Ontario is $300 or $500.
There are certain cases where an insured person is not required to pay a deductible in a comprehensive claim. An example of this would be a situation where your vehicle was stolen. When it comes to car theft, no deductible is required.
Higher or lower deductible?
As a car insurance policy holder, in most cases you have the ability to increase or decrease your deductible to suit your needs. Insurance companies use deductibles as a way to keep the cost of car insurance lower for everyone.
The higher your auto insurance deductible, the lower your monthly or annual premium. And the lower your deductible, the higher your premium.
Determining the best deductible for you is a personal decision and there are a few factors to consider:
- How confident are you in your driving abilities?
- Do you have an emergency fund or other money to easily draw upon in a time of need?
- What is your monthly cash flow / financial situation?
- Are you comfortable with a certain level of risk?
- Where do you live?
If you raise your insurance deductible to $1000 from $500, you will save on your monthly insurance rates. Sound great, doesn’t it? Yes, just also be aware of the fact that each time you file a claim, you must be able to pay $1000 out of pocket. If you are a good driver, have money saved, value greater monthly cash flow, aren’t afraid of assuming some level of risk or live in a less populated area, this might be a smart choice.
On the other hand, if you are weary about your driving abilities, do not have extra money to draw upon, can afford slightly higher monthly rates, are averse to risk or live in a densely populated city where minor accident rates are high, then a lower deductible may be the better option for you.
Assess your personal life circumstances to determine the best coverage and deductible choices for you.
Assess, decide, lock it in
Whatever you ultimately choose, be sure to take the time to evaluate your situation, crunch a few numbers and determine what works best.
Speak to your insurance broker or insurance company directly to hear your options. They can run different scenarios through their system and provide you with specific numbers. This way, you’ll easily be able to understand how different deductible amounts can change your premium.
Carefully consider your individual situation from all angles and understand where you stand to gain the greatest benefit from the best-suited deductible amount.