Whether you are in the market for auto insurance, health insurance or home insurance, you’ll need to choose a deductible to go along with the benefits and limits of your policy. A deductible is the out-of-pocket expense that each policyholder must pay when an insurable incident occurs that results in a loss. When an insurable incident’s cost is equal to or less than the deductible, the responsibility to pay for the damages is yours. When it exceeds the deductible, the insurance company will step in to pay the amount of the loss that is equal to the amount between the deductible and limit.
Because deductibles reduce the financial risk that the insurer is exposed to, the higher your deductible is the lower your premiums will be. This creates a very tempting situation in which many consumers opt for the highest deductible possible, allowing them to comply with the requirement to have insurance but control costs with a small premium. But if the unthinkable—an insurable incident—actually occurs, those individuals are left without the means to actually pay their deductible, and that means they might not even be able to have their home or automobile repaired or their illness receive treatment.
That’s why, when you choose a deductible, you can’t just pay attention to the premiums that go along with it, you must think about the resources you have available to pay it.
Evaluate Your Budget
Your monthly budget is the general road map of what you can, and cannot, afford in terms of a deductible. When you look at your budget, do you see a way that you could get the money to pay your projected auto, home or health deductible without missing a payment on your bills or credit cards? What if the insurable incident included more than one type of loss and, therefore, more than one policy deductible? If not, then you need to think about lowering your deductible so that it’s affordable based on your actual income and expenses.
Measure Your Risk
While your deductible should never be based totally on what you perceive your risk of accident or insurable incident to be, it can play a small role in choosing the right deductible. As an example, if you drive only once each week and only to the neighborhood store, you may be comfortable with a higher auto insurance deductible because your exposure to risk is so limited.
The trick here is not to underestimate your risk. Try to be practical about your actual exposure and how much of your risk you really control.
Consider Your Savings
Your emergency savings is there for you during any difficult time, and an insurable incident that requires the payment of a deductible certainly qualifies. But if a deductible is going to force you to access other savings—like retirement savings or annuities—and will cause penalties, realization of investment losses, or a taxable incident, then you might want to rethink it. Adding additional expenses like penalties and tax consequences to your deductible will make it that much more expensive and difficult to recover from. And if you are forced to sell stocks and realize a loss, you could be missing out on upside potential in the future.
Never Rely on Credit
Many consumers hold onto credit cards so they can use them during an emergency. But relying on a credit card to pay your deductible could mean setting yourself up for months, or years, worth or debt and interest accrual. Having credit cards available to act as a safety net certainly makes sense, but it isn’t a good way to plan to pay your deductibles.
The ability to pay your deductibles without penalty, without the creation of a taxable event, and without the addition of debt are all important factors to consider, no matter how low you estimate your risk to be. Don’t set yourself up for financial difficulties simply because a low premium looks appealing. Consider the overall financial risk that a high deductible places on your budget, and respond accordingly.
For information about Concord auto insurance, give Insurance Agent2000 a call at 925-827-0510.