Rachael Green
A car insurance deductible is one of the most important elements of your auto insurance coverage. Therefore, knowing and understanding the four different types of deductibles is crucial.
If you're buying a car soon or switching insurance providers, check out the different types of deductibles and get tips on how to set the right amount for you.
How do car insurance deductibles work?
A car insurance deductible is the amount of money you have to pay out of pocket toward an insured loss before your insurer steps in. After deducting that amount from the total claim value, your insurer will pay you the remaining balance of the claim.
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For instance, say your car insurance deductible is $500. If you're in an accident and the insurer determines the damage to your car will cost $5,000, you're on the hook for $500 of those repair costs and the insurance company pays out the remaining $4,500 for the claim.
If you've ever dealt with health insurance or home insurance deductibles, it's a very similar process for car insurance.
However, unlike health insurance, it's not an annual deductible. In the example above, you would be responsible for the first $500 of each claim you make, even if you've already paid a deductible on a claim earlier that same year.
Unlike home insurance, car insurance typically pays out after the repairs are made, instead of sending you a claim check beforehand. Often, the insurance company will pay its share of the claim directly to the repair shop. Then, you pay your share (the deductible) to the repair shop when you pick up your car.
Car insurance deductibles typically only apply if you're making a claim on damage to your own car or property in an accident where you are deemed at fault. They don't apply for liability claims, in which your insurer pays out a claim to the other driver.
Four types of car insurance deductible
Deductibles usually are paid on claims that fall under four types of coverage in your car insurance policy.
1. Collision
If you damage your vehicle in an accident where you are at fault, this damage will be covered under your collision insurance. However, you will need to pay a deductible on the claim.
2. Comprehensive
If your vehicle is damaged by something out of your control, your comprehensive insurance could pay for repairs. Examples include hitting a deer, storm damage or theft. This type of insurance usually also covers vandalism and fire. These claims will incur a deductible.
3. Uninsured or underinsured motorists
If someone without insurance or without enough insurance coverage to pay out your claim in full is found at fault for a car accident involving you, your uninsured/underinsured motorist coverage would pay out the rest of that claim to you.
In that event, a deductible could apply depending on where you live.
4. Personal injury protection (PIP) coverage
In most states, the driver who caused a car accident is considered "at fault," and their insurance is required to pay for medical bills. But twelve states* operate under "no-fault" laws, meaning you are required to file bodily injury claims with your own insurance company through Personal Injury Protection (PIP).
This type of insurance covers your medical expenses resulting from an accident, even if you are not at fault. Some no-fault states will allow you to opt out of PIP coverage.
PIP coverage will also come with a deductible.
*The 12 no-fault states include Florida, Hawaii, Kansas, Kentucky, Massachusetts, Michigan, Minnesota, New Jersey, New York, North Dakota, Pennsylvania and Utah.
What is the best car insurance deductible?
Car insurance deductibles can range from $100 to $2,000, with many options in between. The average car insurance deductible is $500. Determining a good car insurance deductible depends on your individual financial situation and driving history.
While the lowest possible deductible sounds tempting, insurers typically charge higher premiums on policies with low deductibles. So choosing a higher deductible is one way to lower the cost of car insurance.
How do you choose a car insurance deductible?
When choosing a car insurance deductible, consider how often you drive and what risks are most relevant in your area. If you don't drive often, it might make sense to take a higher deductible since you're less likely to get in an accident in any given year.
Meanwhile, if you live in an area that experiences intense hurricanes, tornadoes or other storm damage, you might opt for a lower deductible so you're not forking out too much each time hail cracks your windshield or flooding damages your car interior.
Ultimately, though, it comes down to how much you're willing to pay now on premiums versus how much you're willing to risk being on the hook for if you're in an accident.
For instance, if you have the money readily available, you could pay higher premiums and choose a lower deductible. That means if you do file a claim, you’ll pay less out of pocket for repairs.
On the other hand, if money is tight, you may opt for lower premiums to pay upfront, and choose a higher deductible on the policy. When going this route, it may be worth setting some money aside in a high-yield savings account until you have at least enough saved to cover your deductible.
Use our tool below, powered by Bankrate, to compare the best savings rates today.
Are car insurance deductibles tax deductible?
If you use your car for business, your car insurance premiums and any deductible payments may be tax deductible. Say you invest in real estate and you drive to house you're working on to meet with the contractor or check on work progress. That counts as business use. If you run to Home Depot to pick up paint or tools to put in some sweat equity on that house, that drive to and from the store counts as business use, too.
However, if the car is also used for personal errands that aren't work-related, tax deductions get tricky. You'll need to keep track of your mileage and calculate the percentage of your total mileage driven during the year that was for eligible business purposes. That percentage is the amount of your premiums and other car expenses you can claim as a deduction.
Note that your car insurance deductible can only be claimed on your taxes in certain circumstances, and the calculation is even trickier than deducting premiums. So it might be best to get help from a tax pro when it's time to file taxes for a year when you were in a car accident.
Bottom line
Car insurance deductibles represent the policyholder’s out-of-pocket cost when filing a claim against their policy. Deductibles vary by policy but could range between $100 and $2,000. Typically, the higher the insurance premiums, the lower the deductible will be, and vice versa. Overall, policyholders should consider how much they can afford to pay out of pocket when selecting a car insurance deductible.
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