Two names for the same idea
In the United States the amount you pay toward a covered loss before the insurer pays the rest is called a deductible. In the United Kingdom and some other countries it is called the excess. The concept is the same, though policies differ in detail, so read your own policy documents and ask your insurer or a local regulator if something is unclear.
The premium is what you pay regularly to keep the policy active. The deductible is what you pay only if you make a claim. The two are linked: choosing to bear more of the risk yourself generally lowers the premium, and choosing to bear less generally raises it.
How a deductible works in a claim
Imagine, hypothetically, that your policy has a deductible of 500 and a covered repair is quoted at 3,200. You pay 500 and the insurer pays the remaining 2,700. With a deductible of 1,000 on the same repair, you would pay 1,000 and the insurer 2,200.
Now consider a smaller repair of 800 with a 1,000 deductible. The repair costs less than the deductible, so the insurer pays nothing and you cover the whole bill. A claim may also affect your future premiums, which is one reason people sometimes choose not to claim for minor damage, though that depends on the insurer and local rules.
Which coverages usually have one
Deductibles commonly apply to coverage for damage to your own vehicle, such as collision or comprehensive-type cover, or to theft and weather damage. They often do not apply to liability coverage, which pays for harm you cause to others, though this varies. Some policies set different amounts for different types of loss, and some have separate amounts for things such as glass. Check the schedule of your own policy.
The premium trade-off
A higher deductible usually reduces the premium because the insurer expects to pay out less in small claims. How much it reduces varies by insurer, location, driver and vehicle, so the only reliable way to know is to ask for quotes at several deductible levels.
Here is a hypothetical comparison. Suppose raising your deductible by 500 lowers your annual premium by 150. You would be saving 150 each year in exchange for taking on an extra 500 of risk in a claim. Dividing 500 by 150 gives about 3.3, so if you went roughly three years without a claim, the savings would have covered the added exposure. If you make a claim sooner, you would have been better off with the lower deductible. Since nobody knows in advance, this is a judgment about risk and savings, not a formula that guarantees a winner.
Questions to ask when choosing
- Could I pay this amount tomorrow? The deductible you choose should be money you can actually find on short notice. A low premium is little comfort if a claim leaves you unable to pay the deductible and get the car repaired.
- How likely am I to claim? Driver history, where the car is parked, and how much you drive all play a role, though no one can predict an accident.
- How much does each step actually save? Sometimes the savings from moving to a very high deductible are small, and sometimes they are meaningful. Compare quotes.
- Does the deductible apply per incident or per year? Most apply per claim, but policies differ.
- Are there other deductibles? Some policies have separate amounts for specific coverages or for particular drivers.
If you have a loan or lease
Lenders and lessors often require comprehensive and collision-type coverage and may cap the deductible you can choose. This is stated in the finance agreement, so read it. If your car is financed, also consider what happens if the car is written off for less than you owe, which is the subject of gap cover.
What a deductible does not do
A higher deductible does not make your car safer or lower the likelihood of an accident, and a lower deductible does not mean the insurer will pay everything. Policies also have limits, exclusions and conditions. The deductible is only one of several features that shape what you pay, alongside the coverage limits and the terms for how the insurer values the car.
When the time comes to make a claim, the insurance claim process describes what typically happens, and good accident documentation will help the process go more smoothly. Understanding your deductible beforehand means you will know what to expect.
A practical way to decide
Start from your savings. If you have an emergency fund that could cover a higher deductible, a higher level may be reasonable. If your savings are thin, a lower deductible with a higher premium may give you more predictable costs. Get at least a couple of quotes at different deductible levels, compare the yearly difference, and pick the level where a bad day would not become a financial crisis. Revisit your choice at each renewal because your savings, your car and the market all change.