Should I increase my deductible?

Increase your deductible and save money on insurance

Should I increase my insurance deductible to save money? This is common insurance advice. TurnersTips wants to help you understand deductibles. Ask for an insurance quote with different deductibles. Then you make a choice as to how you spend your money.

I am sure you have read in numerous magazines and newspaper articles that one of the first things you do to save money on insurance is increase your deductible. Unfortunately this is one of those blanket answers that really does not apply well to everyone. A deductible is the amount that you pay on the loss. You are agreeing that you will expense yourself for that amount in the future when a claim does happen.

Home Insurance

The first thing we need to do is look at the math. Let's first consider tenant insurance:

  • Insurance cost is $200/year.
  • Savings for increasing deductible from $500 to $1000 is 15% = $30/year.
  • Five years of savings then have first claim = $150.
  • $500 increased deductible costs you $350

Next we will consider a homeowner policy:

  • Insurance cost is $500/year.
  • Savings for increasing deductible from $500 to $1000 is 15% = $75/year.
  • Five years of savings then have first claim = $375.
  • $500 increased deductible costs you $125

If you go 13 years without a claim on the tenant's policy then you have beaten the insurance company rates. If you go seven years without a claim on the homeowner policy then you win again.

If you are doing calculations on your own policy as you read this then do be aware that the insurance companies put a limit on the amount that they will allow as a credit for increasing deductibles. So if you have a high-end home then you will likely hit this ceiling. Most companies will put a limit of $200 total savings on a $1000 deductible. You can go to higher deductibles for increased savings.

Car insurance

You will be considering a deductible on car insurance for the Section C coverage. This is Collision, Comprehensive and Specified Perils. There is no one answer here. The insurance companies usually give about a 17% credit on a higher deductible. If your vehicle has a high rate group then going to a higher deductible could be a smart move. You need to ask your agent or broker about giving you a quote.

If you have a fleet of vehicles then using a higher deductible can total up to a significant savings. There is strength in numbers. Unfortunately this only applies to commercial vehicles and is not available to most people.

Business insurance

Business insurance often has higher deductibles. This is because there is a greater chance of having a claim and the payouts usually will be greater.

Business people understand risk management well. They use insurance for the claims that they cannot avoid or control. The important thing is to continue the business in a profitable manner. A business person will use all the tools at their disposal to prevent claims from happening.

A deductible can be used by the agent or broker to negotiate acceptance of a class of business. Gaining a reduced deductible is another way to improve a policy without the insurance company having to give up premium earned. So you can see that business people use higher deductibles as a tool in their insurance strategy.

You control your insurance

Whatever your circumstance is, do not accept a general statement that a higher deductible is always the answer. Talk to your agent or broker and look for the best ways to handle your insurance needs. Consider what can happen that will cause a financial consequence. How severe will that be? How likely is it to happen. Next you look at your personal situation for how well you can avoid or reduce a financial loss. Ask questions and take control.