Understanding your deductible: A simple guide

When you're buying car insurance, the term "deductible" comes up a lot. Choosing the right one is a crucial decision that directly impacts how much you pay for your policy and how much you'd pay out-of-pocket after an accident. But what exactly is it?

What is a deductible?

In simple terms, a deductible is the amount of money you agree to pay toward a covered claim before your insurance company starts to pay. Think of it as your share of the repair bill.

For example, if you have a $500 deductible and you get into an accident that causes $3,000 in damage to your car, you would pay the first $500, and your insurance company would cover the remaining $2,500.

The relationship between deductibles and premiums

There's a simple trade-off when it comes to deductibles and your premium (the amount you pay for your policy):

• A **higher deductible** means you're taking on more financial risk yourself, so the insurance company will charge you a **lower premium**.
• A **lower deductible** means the insurance company is taking on more risk, so they will charge you a **higher premium**.

"Choosing a deductible is about finding the balance between a manageable monthly payment and a potential out-of-pocket expense you can comfortably afford."

How to choose the right deductible

There's no single right answer, but a good rule of thumb is to choose the highest deductible you can comfortably afford to pay at a moment's notice. Ask yourself: "If I got into an accident tomorrow, could I easily pay this amount without financial hardship?"

Consider your emergency fund. If you have a healthy savings account, a higher deductible of $1,000 or more could save you a significant amount on your premiums over time. If money is tighter, a lower deductible of $250 or $500 might provide better peace of mind, even with a slightly higher monthly payment.