Car Insurance 101

Car Insurance 101 - Raise Your Deductible and Lower Your Rates

Car Insurance 101

When shopping for car insurance many drivers automatically select the plan with the lowest deductible. After all a low deductible means less money out of your pocket in the event of a crash. That may seem like a smart money saving strategy, but in reality it can be just the opposite. That is because those low deductibles come at a price, and a policy with a low deductible is likely to have much higher premiums than a similar policy with a higher deductible.

If you are reasonably good at managing your money it may be better to accept a higher deductible and use the money you save to build up an emergency fund that can be tapped in the event of an accident. This allows you to enjoy greater control over your money while reducing the financial pain that a higher deductible would otherwise create.

Just consider the following hypothetical example of a driver with a car insurance policy and a $250 deductible. The monthly cost of that hypothetical policy is $100, but if the driver is willing to accept a $500 deductible instead the cost drops to $75 per month. In that scenario the driver can change the policy and direct that $25 a month cost savings into a savings account. In less than a year that driver will have enough to cover the cost of the additional deductible, and the money belongs to the driver – not the insurance company. If the driver has an accident he or she can simply tap the funds in the savings account. If the driver remains accident free those $25 monthly payments will keep building, providing an excellent cushion against not only car crashes but other unexpected events as well.

By using this strategy drivers can save themselves a great deal of money and eliminate many hassles. By accepting a higher deductible drivers can save money on their premiums and use those savings to create an emergency fund they can tap in the event of an accident.

Implementing this strategy is not difficult, but it is important for drivers who plan to use it to exercise fiscal discipline. This strategy will only work properly if the money saved on monthly premiums is directed to a special fund that will be used to cover that higher deductible. Drivers who are unable to exercise this type of financial restraint may not be able to make this type of strategy work. Those drivers may be better off putting accepting the higher premiums that come with lower deductibles, but for those who are able to handle their finances properly a higher deductible lower premium scenario can make a lot of sense.