What happens to an insurance premium when a deductible is lowered?

Insurance Q&A: “What happens to an insurance premium when a deductible is lowered?”

Almost everyone is covered by some type of insurance policy, whether it’s health insurance, auto insurance or life insurance. If you have ever bought an insurance policy, you have probably heard about premiums and deductibles. So how do these terms impact one another?

An insurance premium is the amount of money that a person or business pays in exchange for insurance coverage offered by an insurance carrier. The amount of insurance premium will depend on a variety of factors, such as the type of policy, the likelihood of filling claims, and where you live.

With regard to car insurance, a deductible is the amount of money you are responsible for paying in the event of an accident. It’s the amount you must pay each month towards a loss or liability before the insurer starts paying on your behalf. You will have to meet your annual deductible before the insurance carrier begins to pay.

For example, if your health insurance plan has a $500 deductible, you must pay this amount before the insurance provider starts paying your medical bills.

Car insurance policies have physical damage deductibles in place in an effort to reduce the number of small insurance claims filed, and to keep the cost of insurance premiums down.

Similarly, home insurance and health insurance policies have deductibles in place to minimize costs and reduce superfluous visits.

Deductibles Are In Place to Reduce Claims

Think of it this way; what would prevent us from filing a claim to fix every paint scratch or ding on our car?

Or visiting the doctor every time we sneeze if we didn’t have to come up with some of the money for the repair or the visit?

Insurance companies would quickly go out of business if they had to settle a claim for every negative event that occurred in the world.

Remember, insurers have to employ a lot of staff just to process a claim, no matter how small or large it is.

Read More: Are Car Insurance Premiums Tax Deductible?

As such, your insurance premium will increase if you choose to lower your deductible.

When shopping for insurance, you’ll typically be offered a choice of deductibles ranging from $250 to $1,000.

How deductibles affect insurance premiums is – the higher the deductible you choose, the lower your insurance premium will be.

Conversely, the lower the deductible, the higher the insurance premium.

Lower Deductible = Higher Premium
Higher Deductible = Lower Premium

The amount of your premium is directly related to the amount of your deductible. When purchasing an insurance policy, it may be tempting to get the policy with the lowest premium. However, a lower monthly premium will usually have a higher deductible.

It is generally recommended that you carry the highest deductible you can afford; this will likely save you money over time.

Sure, you’ll have to pay more in the event of a claim, but your insurance premium will cost less each year, which could offset future costs, assuming a claim even occurs.

Read More: Will my premium go up if I file an insurance claim?

However, if you think that you won’t use your insurance very often, you should opt for a plan with a lower monthly insurance premium and a higher deductible. It’s useful to consider how much in case of an emergency you would be able to pay out of the pocket expense.

You can contact your insurance agent to find out what deductibles may be in effect for your policies or to adjust the amount of your deductible.

You can take things a step further and avoid filing claims and just pay out of pocket for any property damage you suffer if financially capable, assuming its relatively minor.

Insurance companies use Motor Vehicle Record (MVR) and CLUE reports to determine your individual claims history and subsequently how much to charge you for insurance.

If a bunch of claims show up in your records, you’ll be looking at higher insurance rates come renewal time.

If you’re looking to lower your existing insurance rate, you can adjust your deductibles to save on the insurance cost (as noted above), shop for insurance quotes online, and/or explore possible discounts that may have been overlooked. (For more information, read our “10 Ways to Lower Your Car Insurance Premium“).

There are a number of options available to lower your rate without switching to another insurance provider.  Check out the good driver discount and/or the good student discount.

Both of these options may allow you to keep or increase your current coverage or liability limits without lowering your deductible!