Save on Insurance by Increasing Deductibles

​Having insurance for your home and vehicle is vital to ward off financial catastrophe when accidents happen. Unfortunately, insurance policies are becoming increasingly more expensive. One thing you can do to decrease your insurance cost is to consider increasing your coverage deductibles.

​Higher Deductible, Lower Insurance Cost

​Deductibles are the out-of-pocket cost you must pay before your insurance company steps in with their coverage. If you are willing to increase your deductibles, your insurance company will lower your monthly insurance premium.

By increasing car insurance deductibles from $500 to $2,000, the average American would save 16 percent a year. The exact amount you would save on either car or home insurance depends on the state you live in, your demographic profile, and claims history.

​Do the Math

​Before you decide whether upping your deductibles is right for you, find out how much you would save. Suppose you would save $200 a year by increasing your car insurance collision and comprehensive deductibles to $2,000 from $500. After 7½ years, you would accumulate enough savings to make up the extra $1,500 out-of-pocket cost should you have an accident.

Now consider how likely you are to have an accident. About six in every 100 U.S. motorists file a collision claim every year and 3 in 100 file a comprehensive claim, according to the Insurance Information Institute. If those claims were spread out evenly, that means every motorist would go 16½ years before filing a collision claim and more than 33 years before filing a comprehensive claim.

Of course, claims are not spread out evenly and no one person's experience is "average." Your actual risk will greatly depend on how safe a driver you are, how many miles you drive a year, and where you drive. You need to make a similar estimate of your chances of filing a claim on your homeowners insurance.

​Avoid the Rate–Hike Game

​Insurance companies are well-known for raising your premium after you file a claim. A higher deductible reduces this risk as fewer claims need to be filed.

A Word of Caution

​Remember that increasing your deductibles can create a financial hardship. In our example, you'll now have to have $2,000 on hand to cover the cost of an insurance claim. Before you change your policy, you need to be prepared by having enough money in a savings account to cover your higher deductible if an accident does happen and you need to file a claim.