Can Raising Your Car Insurance Deductible Save You Money?

Switching companies can save you a lot of money on car insurance, but so can a simple, quick change like raising your deductible.

According to a new study conducted by Quadrant Information Services, increasing your auto insurance deductible from $500 to $1,000 reduces premiums by an average of about 8.5 percent across the United States. A larger change, from $500 to $2,000, can nearly double those savings, to an average of nearly 15%.

Increasing your deductible from $500 to $250, on the other hand, can cost you, raising your premiums by an average of 7% across the country, according to the survey.

However, the savings vary depending on where you live: For example, switching from a $500 to a $1,000 deductible saves Michigan residents the least, whereas Massachusetts residents save the most. Savings can range from 4% to 28% depending on where you live.

According to Bob Passmore, senior director of personal lines policy for the Property Casualty Insurers Association of America, raising your deductible is a "good way for consumers to save money."

The reason consumers stand to save so much is that there are more small claims than large claims, so you can save a lot by agreeing to pay for less expensive car repairs out of your own pocket, according to Passmore.

"That's where you're going to get the most bang for your buck," he says.

How Do You Increase Your Auto Insurance Deductible?

To determine whether raising your deductible is a good idea, you must first understand how auto insurance deductibles work.

If you have a car insurance claim, your deductible is the amount you pay out of pocket. So, if you hit a tree and cause $3,000 in damage to your car, and your collision insurance has a $500 deductible, you'll have to pay that amount while your insurer covers the remaining $2,500 of the repair bill.

Car insurance consists of three major components: liability coverage, which is required in almost all states; collision coverage, which is optional and pays for damage to your car caused by collisions with other cars or objects; and comprehensive coverage, which is also optional and covers just about everything else, according to Passmore.

Liability insurance does not typically have a deductible, but collision and comprehensive insurance do, and you can set a different deductible for each, according to Passmore. (In the Insuroma study, the deductible for both collision and comprehensive was the same.) Because a collision is the most likely type of mishap, Passmore believes that raising your collision deductible will save you more money than raising your comprehensive deductible.

Can You Save Money by Raising your Auto Insurance Deductible?

While increasing your car insurance deductible can result in significant savings in some states, premiums in others may barely change.

According to Passmore, this could be due to differences in the frequency and dollar amount of claims in different areas. States with more densely packed urban areas, for example, may have more collision claims than rural states.

Check out the findings of the Insuroma.com study to see if your state is a great place to save by changing your deductible or if your savings may be less than stellar:

Increase your deductible from $500 to $1,000: In Massachusetts, the switch saves you 17%, while in Michigan, it saves you about 4% on average. Based on the National Association of Insurance Commissioners' state-by-state average auto insurance premium amounts, that equates to a $169 savings in Massachusetts and a $40 savings in Michigan.
Increase your deductible from $500 to $2,000: This significant change is rewarded with significant savings in only a few states. South Dakota drivers save nearly a third on their insurance, while North Carolina residents save about 6%. That works out to $156 per year in South Dakota, but only $37 per year in North Carolina.

Even if you live in a low-savings area, increasing your deductible can be beneficial, according to J. Robert Hunter, director of insurance for the Consumer Federation of America.

This is because paying lower premiums usually works out in the consumer's favor in the long run. In fact, over time, consumers receive an average of only about 65 cents back in claims payments for every dollar they pay for insurance, he claims.

"You want to reduce the amount of money you give an insurance company," Hunter says.

Tips for raising your auto insurance deductible

If you think raising your deductible is a good way to save money, consider these four suggestions first.

Get multiple free auto insurance quotes. The amount you can save is determined by where you live, how much you raise your deductibles, and the amount of your base premium. So do your research and obtain quotes from your insurance agent or company to determine the exact amount of potential savings.
Consider your risk. Saving money on premiums is great, but keep in mind that filing a claim can be more expensive, according to Carole Walker, executive director of the Rocky Mountain Insurance Information Association. Do you have a spotless driving record, or are you prone to mishaps? According to Passmore, lowering your premium by raising your collision deductible may be a wise move if you have few or no claims in the past. In addition, where do you live? If you live in a state with frequent hail, such as Colorado, or one with hurricanes, such as Florida, you're more likely to file a comprehensive claim, according to Walker. If you live in a high-crime area, you are more likely to be a victim of auto theft, which would also fall under the comprehensive portion of your policy, she says. In those cases, she suggests keeping your comprehensive deductible low even if you raise your collision deductible.
Determine how much you can afford. If you decide to raise your deductible, make sure you understand where the money will come from if you do file a claim, advises Passmore. According to him, it's a good idea to budget the amount of your deductible as part of your emergency savings fund. Remember that if you end up paying for a portion of an auto repair with a credit card, the high interest rate could wipe out any savings you gained by increasing your deductible.
Create a long-term savings strategy. If you plan ahead of time, you can save a lot of money in the long run, according to Hunter. In fact, it might be a good idea to put the money you save on premiums into a savings account.

"Let's say I'm saving $120 per year," Passmore says. "I'm going to file that."

Hunter began doing this decades ago, and he's saved more than $18,000 in premium savings, allowing him to keep raising his deductibles higher and higher, saving even more money. He also uses that fund to pay for fender benders, avoiding the hassle of dealing with a claims adjuster and keeping his premiums from rising as a result of claims. You may eventually be able to increase your deductible to $2,000, then $5,000, or even $10,000. "Your premiums can come down significantly," Hunter says.