Higher Deductibles for Lower Insurance Premiums

I thought I would share a personal story today about automobile insurance. Most people are familiar with the concept of a higher deductible leading to a lower insurance premium. For those that are not, let me explain it really quickly:

The deductible is essentially the amount that you pay out of pocket if you need to make a claim. For example, if you have a $500 deductible and get into an accident that caused $1000 damage to your car, you would pay the first $500 and the insurance company would cover the rest. If the damage was $501, you would still pay $500 and then the insurance company would cover the $1 remaining – of course you may not want to file the claim in that case for a measly dollar, but you get the point.

If you raise the deductible, from say $500 to $1000, then your premium goes down because the insurance company has less on the line. There would be more minor accidents that wouldn’t even be worth claiming in this case since the threshold for payment is now $1000.

A few years ago, I realized that I had been driving for 12 years and not once had an accident. I figured I could save a few bucks by raising my deductible from $500 to $1000. I forget the exact number but it dropped my premium by about $100/year. I figured that as long as I could avoid having an accident more than once in every 5 years I would come out ahead. If I had an accident, I would have to pay $500 more than before, but I would save $500 every 5 years (not factoring the possible increase in premiums due to multiple accidents though).

A week later I was talking to a co-worker about my new camera phone – all the rage back then – and one great use was for insurance claims. If you got hit in a car accident you could take photos of the accident scene to corroborate your story if need be. Well wouldn’t you know it, but the VERY next day I get plowed into (t-boned) by an 18 year old in a parking lot who had his license a whole 6 months. He absolutely gunned it right into my driver’s side rear wheel.

Really? This just had to happen right after I raised my deductible?

I remember thinking to myself, as I was taking pictures with my new camera-phone of the “crime scene”, that as long as I don’t get into another one in the next 5 years, I’m okay… lol

As luck would have it though, since the accident was so clearly the fault of the other driver who admitted fault right away, HIS insurance actually covered everything and there was no claim filed on my policy at all. So I didn’t have to pay a penny and I have been saving that $100/year ever since. So far, that has been the only accident I’ve had.

Hopefully by writing about it, fate won’t pull the old camera-phone lesson on me again though, and I won’t get into an accident tomorrow.  Good lord, what have I done…

Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 26 comments
  • Michael James

    I’ve had a $2000 deductible on my car for the last decade. Zero claims means that I’ve come out ahead, but I’m not sure of exactly how much.

  • Evan

    That is HORRIBLE! I wanted to raise my deductible but my auto finance company kindly informed me that the contract prevented me from doing so lol

  • Howie

    You’re a good man for sharing that Preet. *knock on wood*

  • Brian

    Preet,

    I didn’t know that if its the other persons fault and their policy can cover damages to your car, you don’t have to file a claim with your insurance. Do you know if that’s the case for all of Canada?

    • Preet

      @Brian – I called my agent right away and put them in touch with the other driver’s insurance company and they sorted it out. But yes, no claim was filed on my policy, everything was covered by the other insurance company. I imagine anything is possible when it comes to these things. It might’ve been cheaper for the other insurance company to pay for everything after their driver claimed fault rather than take it to court, or arbitrate or whatever they do…

  • Cam Birch

    Just over a year ago my wife ended up being rear-ended by another car. While she did everything totally wrong (no license plate, no insurance information, no pictures) it was a very clear cut case. In Alberta (at least) if you rear end someone you are at fault.

    The interesting thing about claims is they really only count when you are at fault. The deductible is directly related to the collision (or comprehensive) coverage on your insurance. Which means that when you are a victim (aka not at fault) the other persons insurance covers you from their liability coverage. When you are at fault it is your collision or comprehensive coverage that covers you.

    A big way to save money is to drive a junker car and have no collision coverage. Then if you are at fault just write off your own car and buy a replacement junker for a couple grand. Double savings but the downside is having to drive that junker car. I prefer having savings and taking the higher deductible.

    The most dangerous place to drive though is no fault insurance states and provinces. There when you get hit your automatically at fault because fault is always shared 50/50. The benefit is that its usually government insurance so your rates are lower, but I certainly don’t like getting the blame when a stupid driver plows into you.

  • gene

    This works for home insurance too. I just entered into an agreement to renew with a $1000 deductible instead of $500. Again, the savings are about $100 per year. My neighbour’s advice is to insure against the big stuff and take care of the little stuff yourself. That makes sense to me. Anything under $1000 is probably not worth filing a claim on anyway, since it will likely raise premiums.

    I anticipate any problems covered by home insurance to be big, so I’m not too concerned about paying $1000 deductible on a $10,000+ claim. I did the math like you, Preet. We’ve been home owners for four years, and I haven’t had to make a claim yet so I feel like my premiums have been somewhat wasted.

    • Preet

      @gene – I’m a firm believer in only insuring what you really can’t afford to replace. I’ll never get the extended warranties on TVs or other electronics, because I could replace them with a few months of saving if they ever died or broke on me. Same logic applies to deductibles for me too.

  • High Risk Insurance

    Great story, I'm glad everything worked out well for you. It's often difficult to find a good company for Insurance, especially high risk insurance. I found Dashers Insurance has great low rates. Who is your insurance company?

    • Patrick

      Wow. Subtle!

  • Mark Johnson

    Wow. I never knew that you don’t have to file a claim against your own policy if it is not your fault. One time a lady in her pickup truck backing out in a parking lot backed into me smashing my fender driver side door. Not this fact, I actually filed claims against my policy and paid my company $500.00 plus rental car mileage fees (total $700) to have them fix it.

    I wish I had known this before.

    Thanks for sharing…

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