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The terminology around auto insurance can be a bit confusing if you don’t know what they mean. One of the most important terms you will come across is “deductible”. Even if you don’t understand much anymore, this is a word that is absolutely essential when choosing your car insurance policy.
Quite simply, the deductible is the amount you have to pay in the event of an accident. However, it’s more complicated than this and your car insurance strategy will depend a lot on how much you can actually afford.
How it works
The deductible is the amount you pay to the insurance company in the event of an accident. For example, if you have a $500 deductible and the accident damage is $1,500, you pay the first $500 and the insurance company pays the remaining $1,000. Likewise, if your deductible was $1,000 and the damage was only $800, you’d pay the whole thing.
Deductible affects your rates
Auto insurance requires you to pay a certain amount each month or year. This is your monthly rate and it usually doesn’t change within the year unless you have an accident. The amount you pay each month depends on how much deductible you are willing to pay, or how much of the initial costs you are willing to pay in the event of an accident.
The most common deductible amounts in auto insurance are $100, $250, $500, and $1,000, although different companies may offer other options. The higher the deductible, or the amount you pay in the event of an accident, the lower your monthly amount will be. So if you choose the lowest deductible, $100, which means the insurance company is liable for almost all costs, you’ll end up paying higher monthly rates.
Which option you choose (high deductible/low rates or low deductible/high rates) depends on what you can afford and also how often you expect to need your insurance. If you tend to have accidents every few months, you probably want to pay the minimum amount and let the insurance company cover most of the costs. For safer drivers who have an excellent track record, it’s easiest to go with the higher deductible and pay lower rates instead.
Limits
Every insurance company has a limit on the amount they will pay. The rates you have each month also affect this, so you can decide for yourself how high you want to go for the best limit, without having to pay too much per month. Most drivers never need the highest limits.
How does the limit affect your deductible? Well, you are of course responsible for paying the amount of your deductible, but once the insurance company has paid up to the limit, you will have to pay any charges on that.
To give you a quick example, let’s say your deductible is $500, the limit is $10,000, and the damage ends up being $12,000. You would pay the first $500. The insurance company would then pay their $10,000 and you would be responsible for the remaining $1,500.
Your car insurance doesn’t have to be confusing. Take the time to go through the numbers and find out what you can pay out of pocket in the event of an accident and how much you can pay monthly. A little research goes a long way. It is also helpful to talk to the car insurance agent who can give you a good idea of what the standard would be for the age of your car and your driving experience.
Car insurance explained – What is a deductible?
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