Automobile Insurance

Deductibles and Limits

One of the most frequently asked questions regarding auto insurance is: What deductibles and liability limits should I choose? Remember that deductibles for auto insurance operate differently from those for medical insurance. For auto insurance, the deductible is on a per-cause basis, meaning that each time you have an accident and file a claim, you will have to satisfy the entire deductible amount. (With medical insurance deductibles, you apply payments to the deductible for all your illnesses over the course of the year. Once the medical deductible is met, the insurance company will cover the charges going forward for the plan year.)

Let's go through some examples to help you decide what deductibles and limits are appropriate, given your specific situation.

Deductibles—Collision and Comprehensive

These two types of protection have deductibles built in so that the coverage can be more affordable for the driver. A deductible is a specific amount of money that you are required to pay before the insurance company will reimburse you for damages. For instance, if you have a $500 collision deductible and you were in an accident in which $1,200 of damage was done to the car, you would have to pay for the first $500 of repairs, and your insurance company would pay for the remaining $700. As you probably can imagine, the higher the deductible, the lower the insurance premium. So, how do you know which deductible to choose?

The first step is to call your insurance company or agent and ask them to help you fill in the blanks on the Premium Comparison Worksheet.

Once you receive the information, it is easier to compare which deductible is best for you. Look at the premium differences compared to the deductibles themselves. Don't pay for more coverage than is warranted by the increase in the premium. Let's take a look at an example.



Premium Difference

Deductible Difference











In this example, to decrease your deductible from $500 to $250 would cost you $25 more per year. That would definitely be worth it. On the other hand, to decrease your deductible from $250 to $100 would cost you $165. Here, the increased premium would cost you more than the decrease in the deductible. That is not a good move.

You also need to consider the age and value of your car. If your car is brand new, you will probably want to keep it that way as long as possible. If you are in an accident, you will want to fix the car. You will need the insurance coverage to pay for most of the damage. On the other hand, an older car that is not worth much is more expendable, so you may want to consider dropping collision and comprehensive after a certain point. As a rule of thumb, consider dropping these coverages once the car is worth only a few thousand dollars, when the cost of the extra coverage doesn't significantly outweigh the benefits.

IMPORTANT NOTE: If the car is a classic, and is appreciating in value, you should not drop collision and comprehensive. But, you may want to consider higher deductibles.

Limits—Bodily Injury and Property Damage

Liability coverage is the most important part of your auto insurance coverage. That is why it is important not to skimp on the amount of coverage you purchase. Typically, each state has a required minimum limit that you must carry on your insurance policy. The additional cost of higher limits is usually not that great and is worth the price if you can afford it.

Liability coverage is expressed as a series of three limits, for instance $100,000 / $300,000 / $50,000, which means:

  • $100,000 is the maximum amount the insurance company will pay for bodily injuries to any one person in an accident.
  • $300,000 is the maximum amount the insurance company will pay for all bodily injuries for all people hurt in an accident.
  • $50,000 is the maximum amount the insurance company will pay for damages to another person's property in an accident.

If the expenses exceed the limits, you are responsible for paying the remainder, which could be very costly if it is a major accident with lawsuits. How do you decide which limits will provide you with adequate protection? Examine your net worth. Make sure you try to select limits that will protect your assets.

If the limits are not high enough for you, you may want to consider an umbrella policy. This type of policy is designed to cover you for liability over and above your primary liability coverages. It not only covers you for liability related to an auto accident, but for homeowner's insurance liability as well. Umbrella policies are fairly inexpensive and can save you a lot of money if tragedy should ever strike. See the section Umbrella Policies.

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