Financial Challenge – Day 9

In the last challenge we started to look for better rates for auto insurance. This is an exercise that you should get into an habit of doing on a yearly basis to make sure you’re still receiving the best rate that you can get. In addition, you need to reevaluate the different types of coverage that you’re carrying on your car. This is important becasue as your car gets older, it’s worth less and less and therefore the coverage should be adjusted to reflect this.

auto deductible in case of crash
What is the deductible for these cars?

The next step is to take a good, hard look at your current auto insurance deductible. The deductible is the portion you have to pay out of your own pocket before the insurance company will begin paying. For example, if you have a $500 collision deductible and you accidentally back your car into a pole and put a $200 dent in rear end of your car, you have to pay the entire amount since it is less than your insurance deductible. On the other hand, if you get into an accident which does $1000 worth of damage to your car, you would pay $500 (your deductible) and the auto insurance company would pay the other $500.

While the above example may have you saying that you want a $0 deductible so you don’t have to pay anything if you have an accident, there is one little problem with this. The problem is that the lower your deductible is, the more your insurance payments will be. It’s therefore important to take a close look at what a low deductible will actually cost you. For example, say that your insurance company has told you that increasing your deductible from $250 to $500 would save you $100 a year on your insurance. This would mean that keeping the $250 deductible is the same as paying $100 for $250 ($500 – $250 = $250) in coverage per year. When you look at it from this perspective, a low insurance deductible makes little financial sense.

Your best strategy to save money is to raise your deductible as high as possible with the knowledge that if you do have an accident, you’ll be able to cover the deductible without putting yourself into any type of financial hardship. This is why having an emergency fund is important – not only does it allow you to pay off emergencies without going into credit card debt, it also makes it possible for you to lower other costs such as your car insurance payment. If you’re in a position where raising the deductible will put you in a financial bind, you don’t want to raise the deductible right away, but make a note to raise it as soon as you have built an emergency fund to cover the higher deductible.

car insurance deductible

Depending how old your car is (for example, most cars over 10 years old), it may even make sense to drop the collision and comprehensive coverage all together. This is especially true if the blue book value of your car is worth less than several thousand dollars. This is because any claim you are likely to make will not substantially exceed the combination of your auto insurance costs and deductible amounts when combined together.

In the time that you have set aside for today’s Financial Challenge, look at your current car insurance deductible and start running the numbers using different deductibles. You can plug different deductible numbers in to the online comparison sites and see how that will change your rates or simply call your current auto insurer and ask how much you would save by raising your insurance deductible.

In the next challenge we’ll finish up the auto insurance portion of the Financial Challenge and let you claim whatever savings that you’ve been able to find, so keep those folders (you did make one, didn’t you?) close at hand.

NOTE: The entire challenge series is what I would do with my money and is merely my opinion. You should do thorough research and seek professional advice and decide to do what is best for you. My Disclaimer

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7 Responses to Financial Challenge – Day 9

  1. mjrube94 says:

    I just called Liberty Mutual to check the reduction for switching from a $500 to a $1000 deductible. It would save me $212/year (making the change on 2 cars). However, they informed me that if you have loan(s) out on the car(s), you need to check with your lender, because most lenders mandate that your deductible can be no higher than $500. I’ll be checking that out next…

  2. mjrube94 says:

    Update – One of my loan companies mandates a $500 deductible, the other one does not. So I went ahead and made the change on the one car, which will save me $150/year.

  3. emanuel says:

    very sound advice. thank you.

  4. Rob says:

    I just did this with my current insurer. We have two older cars carrying $500 deductibles on comprehensive and collision. We’ll see how much raising it to $1000 is…

    Great advice.

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