What is the difference between a deductible and a premium in car insurance?
Understanding the difference between a deductible and a premium in car insurance is important for any driver. A car insurance deductible is paid out of pocket before your insurance kicks in. A car insurance premium is a monthly, sometimes yearly, amount you pay your insurance company for coverage.
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Brandon Frady
Licensed Insurance Agent
Brandon Frady has been a licensed insurance agent and insurance office manager since 2018. He has experience in ventures from retail to finance, working positions from cashier to management, but it wasn’t until Brandon started working in the insurance industry that he truly felt at home in his career. In his day-to-day interactions, he aims to live out his business philosophy in how he treats hi...
Licensed Insurance Agent
UPDATED: Nov 27, 2023
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Editorial Guidelines: We are a free online resource for anyone interested in learning more about insurance. Our goal is to be an objective, third-party resource for everything insurance related. We update our site regularly, and all content is reviewed by insurance experts.
UPDATED: Nov 27, 2023
It’s all about you. We want to help you make the right coverage choices.
Advertiser Disclosure: We strive to help you make confident insurance decisions. Comparison shopping should be easy. We are not affiliated with any one insurance provider and cannot guarantee quotes from any single provider.
Our insurance industry partnerships don’t influence our content. Our opinions are our own. To compare quotes from many different insurance companies please enter your ZIP code on this page to use the free quote tool. The more quotes you compare, the more chances to save.
On This Page
- Auto insurance companies charge policyholders a deductible and a premium
- You pay a deductible when your car withstands damage, and you file a claim, but you also pay a premium every month to guarantee coverage
- Your deductible and premium are connected, and paying more for one amount can lower the other
Most drivers pay car insurance deductibles and a premium. Still, these two obligations can be confusing and make you feel like your insurance company is treating you unfairly. However, both are necessary.
Learning the key differences between a deductible and a premium in car insurance will make you feel confident in your protection. Read on to learn more about how these types of car insurance coverages work together.
What is a car insurance deductible?
In the event of an accident, you use your car insurance to file a claim to cover expenses. This is when you pay your car insurance deductible. Your insurance company then covers the remaining cost of the accident. How to file a car insurance claim is an essential process to understand in such situations. Deductibles are not unique to car insurance companies.
Health and homeowners insurance companies also charge them. However, it’s important to note that, with car insurance, you pay any applicable deductible every time you file a claim, so you should understand what deductible is best for you.
When comparing auto insurance companies, you’ll notice that many give you the option of having a certain deductible amount, usually between $100 and 2,000, with the average being $500.
However, since deductibles are unexpected and don’t always fit your budget, some people choose a lower deductible and opt for a higher premium since the latter is regular and easy to build into a budget.
To gain a better understanding of how deductibles work, let’s use an example. Say you collide with another vehicle, and your car requires extensive repairs. You use your collision insurance, and regardless of who is at fault, your insurance company will subtract your deductible amount from how much your claim will pay.
So, if you have a $500 deductible, but your repairs cost $3,500, your insurance company will pay $3,000.
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Why Insurance Companies Require Deductibles
Insurance companies keep their rates reasonable by preventing drivers from filing for every bump and scratch.
In addition, deductible obligations help guarantee claims are legitimate — your insurance company doesn’t want to waste money(and neither should you) and pay for flippant, minor, or fraudulent claims, so it keeps you on the hook for a portion of the cost.
What is a car insurance premium?
The premium is the rate you pay to keep your coverage, and it averages around $100-200 a month, depending on your coverage type. You pay the rate consistently, generally every month, and it is just like any other recurring bill.
Your insurance company determines how much of a premium you will pay by assessing several factors. These include:
- Your age
- Your location
- Your driving record
- Your car’s annual mileage
- The type of car you have (year and model)
- You credit history
- Which coverages you choose
To inquire more about what may affect your premium, you can research car insurance by state.
It’s crucial to always remember that insurance rates can fluctuate. You must ensure your driving record remains in good standing by avoiding speeding tickets, DUIs, accidents, and other serious offenses.
Your insurance rate can also increase if you improve your car, buy a new one, get married, move to a different location, or add a loved one to your plan. Factors like inflation or may also play a role.
Most importantly, you don’t want your insurance company to view you as a high-risk driver, and you don’t want an extensive claim history. Previous at-fault accidents are guaranteed to raise your premium amount, so being a cautious driver is the number one way to maintain a manageable monthly rate.
The Connection Between Car Insurance Deductibles and Premiums
Auto insurance companies interpret high deductibles as shifting risk onto the policyholder, so they’re willing to charge a lower premium amount. But who benefits from a higher deductible, and vice versa?
You may be a low-risk driver who doesn’t often travel, greatly reducing your chances of getting into an accident and filing a claim. In this case, a high deductible of around $1,000 seems like a fair risk.
On the other hand, if you spend a lot of time driving for work or other obligations, you’re more vulnerable to collisions, so you may want to consider a lower deductible and higher premium. Ultimately you have to consider what you can afford — every month and in the event of an accident — and try to balance the two.
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Case Studies: Understanding Car Insurance Deductibles and Premiums
Case Study 1: Balancing Deductible and Premium
John has a car insurance policy with a $1,000 deductible and a low monthly premium. He is a cautious driver and rarely files claims. One day, he gets into an accident that requires $5,000 in repairs. Since John has a high deductible, he pays the first $1,000 out of pocket, and his insurance company covers the remaining $4,000.
Despite the initial out-of-pocket expense, John benefits from a lower premium since he is considered a low-risk driver.
Case Study 2: Lower Deductible for Peace of Mind
Lisa, on the other hand, has a car insurance policy with a $500 deductible but a higher monthly premium. She drives frequently for work and wants the peace of mind of a lower deductible. When she gets into an accident that causes $3,000 in damages, Lisa only has to pay $500 upfront, and her insurance company covers the remaining $2,500.
Case Study 3: Adjusting Deductible and Premium for Changing Circumstances
Sarah recently purchased a new car and decided to adjust her car insurance policy. She opted for a higher deductible of $2,000 to lower her monthly premium. However, a few months later, Sarah moves to a busy city with heavy traffic.
Realizing the increased risk of accidents, she decides to lower her deductible to $1,000 and accepts a slightly higher premium. Sarah believes the lower deductible provides better protection in her new environment.
Difference Between a Deductible and Premium: The Takeaway
In the auto insurance world, deductibles are potential costs at fixed rates, and monthly premiums are recurring costs that can change over time. Of course, the two have an inverse relationship, and it’s wise to assess your driving history and how often you use your car — it could save you a bundle in the long run.
Frequently Asked Questions
Is an insurance premium the same as a deductible?
No, a premium is like a monthly bill you consistently pay for coverage. For example, you pay a deductible every time you use your auto insurance to repair your vehicle.
What does it mean when you have a $1,000 deductible?
This is simply how much you pay before your insurance company pays out your claim. In this case, you’d have to pay $1,000 worth of repairs out of pocket before your insurance covers any additional damages.
What is too high of a deductible?
This depends on if you are a high-risk driver or not. If you don’t drive often and rarely use your vehicle for long trips, your deductible may be too low, resulting in a high monthly premium.
On the other hand, if you drive regularly and have a lot of miles on your vehicle, it may be too high since you are more likely to get into an accident.
Are you looking for free insurance quotes?
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Brandon Frady
Licensed Insurance Agent
Brandon Frady has been a licensed insurance agent and insurance office manager since 2018. He has experience in ventures from retail to finance, working positions from cashier to management, but it wasn’t until Brandon started working in the insurance industry that he truly felt at home in his career. In his day-to-day interactions, he aims to live out his business philosophy in how he treats hi...
Licensed Insurance Agent
Editorial Guidelines: We are a free online resource for anyone interested in learning more about insurance. Our goal is to be an objective, third-party resource for everything insurance related. We update our site regularly, and all content is reviewed by insurance experts.