June 16, 2011

Lower Auto Premiums Versus Higher Deductibles And The Risk Involved

Many factors are considered by auto insurance companies when establishing lower auto premiums. People have little control over some of these. However, there are others that people can control. One such consideration is the relationship of a deductible to the premium.

The deductible of an insurance policy is how much the insured pays out of pocket prior to the insurer paying. If an accident causes $2,000 worth of damage and a person's deductible is $500, then he or she will pay $500 and the insurance company will cough up $1,500. The premium of an auto insurance policy is how much the individual pays for coverage.

Naturally, the higher the deductible the more risk the individual is assuming, and the less risk the insurance company has. In reverse, the lower the deductible the less risk to the person and the insurance company will have to pay more if there is a claim filed. Since insurance companies set their premiums based on calculations of risk, these two have an inverse relationship. As the deductible is raised, the premium is lowered. In contrast, a lower deductible will result in a higher premium.

Everyone wants to save on their auto insurance premiums, and there are multiple ways to do this. A couple of common factors that people alter are the deductibles, and the limits. The limits are the maximum amount an insurance company will pay. Often in order to achieve a lower premium, people will reduce the limits of their policy and not change the deductible. However, this is dangerous; consider the following scenarios.

Sam has a $300,000 limit on his policy and causes a 20 vehicle accident on the freeway, damage could be $1,000,000. He will pay the first $500 deductible and then the insurance company would pay the next $300,000. However, after that the Sam is responsible for the remaining $695,000. His total cost is $695,500, and all to save a little on a premium.

Sarah, on the other hand, raised their limit to $1,000,000. She was able to keep her premium comparable to Sam's by raising the deductible to $2,000. If she causes an accident identical to Sam's, Sarah will pay more up front. She would pay the first $2,000. But after that higher initial expense, the insurance company will cover the remaining $998,000. Her total cost is only $2,000, and she saved the same amount on lower auto premiums.

Insurance is meant to cover catastrophic events. The best way to responsibly save on auto insurance is by taking on manageable risk. Raising a deductible will lower the premium, without being irresponsible.