Reader Question:
Hey Austin, I read one of your posts the other day where you suggested to someone that they carry a high deductible on their auto insurance, like $1,000. Isn’t the point of auto insurance to pay the majority of the claim for you…so why would I voluntarily pay more of the claim?
Jacob, Houston , TX
Hey there Jacob,
Yes, I did and still do recommend people carry a high deductible rate like that. I do on my personal vehicles and the savings on my annual premium is substantial. I look at it this way.
I have not been in an accident or had a claim in over 10 years and I am a pretty safe driver. I have 2 fairly new vehicles worth more than $25,000 each and would not claim anything on my auto insurance policy that was LESS than $1,000 for fear of a rate increase or being dropped.
The deductible is the amount YOU have to pay, but you only pay the deductible when the claim is paid by YOUR insurance company. So, if you are a safe driver with a clean record you first have to have an accident or a claim, AND that claim has to be paid by your carrier. So two things really have to happen before you pay out your $1,000.
The average repair bill for an auto accident is about $5,500!! I save about $300 a year on my total premium because I set my deductible at $1,000….so over the last 10 claim free years I probably saved $3,000!!!
My advice is to take that $3,000 savings and buy into a good mutual fund earning 8% return over the past 10 years. That $3,000 could have doubled within those 10 years. If you get into an emergency…use the money.
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Blessings
Austin Davis
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While the average cost of repairing damage after an auto accident is high, it is not nearly as high as you claim. Mitchell Collision Repair Industry Data report (Summer 2006) puts the average collision loss at $2,560 and the average comp loss at $2,111. Third party damage is $2,123.
There’s also the trend of diminished value to consider as insurance companies are forced to pay these claims with greater frequency. Diminished value carries a hefty price tag – my most recent figures being slightly more than 30% of a car’s retail value AFTER repairs are complete.
For more info and a slideshow on diminished value click here.
Still, I’m in your camp. Give me the higher deductible. However, bear in mind that carrying big deductibles is all about taking risks – and many people aren’t willing to do that.