Make Deductibles Work For You

Selecting an appropriate deductible is one of the easiest ways to control the costs of insurance yet very little time is actually spent working out the numbers. So what exactly should we consider when selecting the best deductible on our policies?

If you're like most, selecting a deductible is a quick analysis of what we're willing to spend out of pocket on any claim rather than savings we would see by simply looking at our own financial situation. Certainly if cash flow is tight and your one car is the difference between getting or keeping a job, then selecting a deductible that is easily met should be your priority. However, let's say that cash flow and savings is healthy, and you have more than one mode of transportation. If this sounds like you, you just might be surprised what you'll find.

So what is an appropriate deductible? My household looks at 4 things when selecting a deductible: 1) claims history, 2) cash flow and/or savings, 3) transportation alternatives-more than one car for example, and 4) vehicle depreciation or age of the vehicle. Let's take a closer look at claims history since most of us can go years, sometimes decades without a damage claim.

When I look at claims history I'm looking at how often I've had an incident that I would need help covering. I'm not likely to file a claim for a repair that would cost less than $2000 because this damage is relatively minor plus I typically have enough in savings to cover this level of repair (#2, cash flow), by the way, claims do hurt your insurance score and will result in higher rates. As an experiment, I recently renewed my auto policy with a $1000 deductible and then raised it a week later to $2000 just to see the impact on my premium. This change in my policy saved me $123 a month or $1476 over a year.

I've been driving for over 37 years now and I've only had one major accident which resulted in repairs over $6000 so history is definitely on my side but let's look at the math. If we multiple this savings of $1476 by 36 (we exclude the year of the accident) that savings comes to a whopping $53,136. Let's say we took that savings every year, earned 5% on that money, compounded annually over 36 years would now be worth $148,527.13. Wow!

Of course insurance is protection from the unexpected so how do we protect ourselves when the unexpected happens? Easy. Buy insurance. Remember, you're not eliminating coverage, just modifying your policy to reflect a more accurate picture of your finances which can result in extraordinary savings - I bet you can find plenty of other things to do with $148,527.

Point is, we should probably spend a little more time with deductibles or we could be leaving a lot of money on the table. My agency can help put it all in perspective so give us a call to schedule your complimentary insurance review.