Why does having a higher deductible lower your insurance premiums?

A higher deductible makes you less likely to file a small claim and places more of the financial burden on you if you do file one. Insurance companies reward you for reducing their risk of paying a claim.

Let’s say you have a deductible of $1,000 for comprehensive coverage. A tree falls on your car, damaging the hood. The damage is $900. In this case, it’s below your deductible, so you won’t file a claim and the insurance company doesn’t have to pay. If you had a $250 deductible, you would likely file a claim, pay $250, and the insurance company would have to pay the remaining $650.

Someone with a $1,000 deductible pays less in premiums because they carry more risk and can’t file a claim for less than that amount.

How does a higher deductible reduce premium costs?

Playing around with your deductible can lower or raise your insurance premiums significantly.

For instance, according to the Insurance Information Institute, changing your deductible from $250 to $500 can yield a 15-20% reduction in rates. And if you go from $250 to $2,000? You can save a whopping 40-50% on your premiums.

It’s all about risk, and the higher the deductible you’re willing to pay, the less the insurance company has to pay in the event of an accident. Insurance companies have to factor in the make and model of your car along with other factors like your driving profile and to try to predict not only the likelihood of you getting into an accident, but what it might cost if that were to happen. What would repairs cost? How can they balance the amount of money they might have to pay out on your behalf with the amount you’re paying for the policy.

What is the highest deductible for car insurance?

The highest deductible you can choose depends greatly on your insurance company. Deductible amounts vary from state to state and company to company. While the average across the board is $500, the highest typical deductible is generally $2,000-$2500.

Do you want a high or low deductible for car insurance?

Your financial situation should determine whether you choose a high or low deductible.

“You might go with a lower deductible if you don’t want to deal with a large out-of-pocket bill when something goes wrong, and you're okay paying a higher monthly premium. On the other hand, a higher deductible could be a better choice if you have enough savings to cover a bigger upfront cost after a loss and you'd prefer to pay a lower premium each month,” Deng says.

Keep in mind that if you're financing the vehicle, sometimes the lender gets to choose your deductible. Technically, they own the car so they get the final say. Some banks don’t want a high deductible because this means you might not be able to afford the repairs should something happen to the car. Their first concern is keeping their asset intact.

Pros and cons of having a higher car insurance deductible

High deductible
Pros	Cons
Lower monthly premiums	You pay more in the event of a claim
Lower likelihood of filing a claim	You need savings to cover the deductible
Not filing smaller claims keeps premiums low	You will have to pay for small repairs out of pocket

Low deductible
Pros	Cons
You pay less in the event of a claim	Higher monthly premiums
You don’t need as much saved up to pay a deductible	Filing smaller claims will increase premiums
You can file smaller claims

How to choose the best car insurance deductible for your needs

To choose the best car insurance deductible for your needs, take a look at your total financial picture and consider these factors:

Can you handle a slightly higher monthly premium? If so, a lower deductible might be right for you.

Would you rather save money and stash it in a savings account? A higher deductible will get you a lower premium, and the cash you save can be used in case you ever need to file a claim, because you’ll have to pay more at that time.

If you have a teen driver, consider the higher risk of a claim. Teens are among the riskiest age groups and have some of the highest car insurance premiums. Considering this, do you want a low deductible, knowing you might have to file a claim, or a high deductible to try to shave some money off your premiums?

Do you have a loan? Your financing company may require a certain deductible, so ask first.

Some car insurance companies have deductibles as low as $250. Don’t be tempted if it will raise your premiums. Take a look at the whole picture before deciding.

Depending on the age of your car, you may not want a high deductible. For instance, say your car is only worth $6,000. A higher deductible doesn’t make sense and won’t likely save you much.

FAQ: Higher deductible car insurance

Is a $1,000 deductible good for car insurance?

The average deductible people tend to choose is $500; however, your deductible should depend on your financial situation. It’s the amount you’re responsible to pay before your insurance company pays out their share, so make sure the amount is something you can handle.

Helpful auto insurance tools and calculators