Having insurance for your home and vehicle is essential to ward off financial disaster should accidents occur. Unfortunately, insurance policies continue to become more expensive. One of the things you can do to lower your insurance cost is to consider increasing your coverage deductibles.
Higher deductible, lower insurance cost
Deductibles are the out-of-pocket cost you must pay before your insurance company steps in with their coverage. If you are willing to increase your deductibles, your insurance company will lower your monthly insurance premium.
By increasing car insurance deductibles from $500 to $2,000, the average American would save 16 percent a year, according to the online insurance broker InsuranceQuotes.com. The actual amount you would save on either car or home insurance depends on the state you live in, your demographic profile and claims history.
Do the math
Before you decide whether upping your deductibles is right for you, find out how much you would save. Suppose you would save $200 a year by increasing your car insurance collision and comprehensive deductibles to $2,000 from $500. After 7½ years, you would accumulate enough savings to make up the extra $1,500 out-of-pocket cost should you have an accident.
Now consider how likely you are to have an accident. About six in every 100 U.S. motorists file a collision claim every year and 3 in 100 file a comprehensive claim, according to the Insurance Information Institute. If those claims were spread out evenly, that means every motorist would go 16½ years before filing a collision claim and more than 33 years before filing a comprehensive claim.
Of course, claims are not spread out evenly and no one person’s experience is “average.” Your actual risk will depend greatly on how safe a driver you are, how many miles you drive a year, and where you drive. You have to make a similar estimate of your likelihood of filing a claim on your homeowners insurance.
Avoid the rate-hike game
Insurance companies are renowned for raising your premium after you file a claim. A higher deductible reduces this risk as fewer claims need to be filed.
A word of caution
Remember that increasing your deductibles can create a financial hardship. In our example, you’ll now have to have $2,000 on hand to cover the cost of an insurance claim. Before you change your policy you need to be prepared by having enough cash in a savings account to cover your higher deductible.