A deductible makes car insurance premiums cheaper. In return for a lower premium, you agree to pay the first part of any costs to repair your vehicle for damage that you cause.

Deductibles typically apply to collision and comprehensive insurance — the physical damage coverages that pay to repair your car — but not to liability insurance, which pays for damage or injuries you cause to someone else.

Deductibles vary, but the amount you choose may have a meaningful impact on your finances. A high deductible can reduce the amount you pay each month or each year in premiums. A low deductible means filing a claim results in little out-of-pocket expense.

Here’s what you need to know about auto insurance deductibles, how they work, and the impact they can have on your insurance premiums and coverage.

What is an insurance deductible?

Your deductible is the amount of money you’re responsible for paying out of your own pocket for car repairs or other covered losses when your insurance company approves a claim. You have to meet your deductible before your insurance policy will begin to pay on a claim.

Deductibles affect the cost of your insurance premiums. Insurance policies with higher deductibles typically have lower premiums. But if you set your deductible too low and get into a wreck, you risk having to pay for more of the repair costs yourself.

Car insurance policies may set different deductibles for different types of car insurance. For example, your insurance policy might include a separate collision deductible (i.e., coverage for accidents), a comprehensive deductible (i.e., coverage for losses not related to collisions), and in many cases a personal injury deductible.

Personal injury protection deductibles

Depending on the state where you live, you might have to carry personal injury protection, or PIP insurance, as part of your car insurance coverage. PIP insurance can help cover the cost of medical expenses, lost wages, funeral expenses, and other covered costs for drivers and passengers, regardless of who was at fault in an auto accident.

If you carry PIP insurance (as a requirement of your state or on a voluntary basis), this coverage might feature a separate deductible. If so, your insurer would subtract that amount before paying your claim.

How does a car insurance deductible work?

When you set up auto insurance coverage, it’s up to you to choose the amount of your deductible. According to the Insurance Information Institute (III), the typical deductible amount on an auto insurance policy is either $500 or $1,000. However, they can range from $0 to $2,500.

Here’s an example of how a car insurance deductible works: Let’s say your car is damaged by a falling tree limb and needs $1,500 worth of repairs. If you have a $500 deductible, you pay that amount first and then your collision coverage pays the remaining $1,000.

Your deductible generally applies each time you file a claim against your auto insurance policy — just like a copay on a health insurance policy. However, there are some exceptions to this rule. For example, if your policy includes comprehensive coverage, your insurer might waive the deductible if you need chips or cracks in your windshield repaired.

Factors to consider when choosing a deductible

There’s a direct correlation between your car insurance deductible and the cost of your premium. It can be difficult to find the perfect balance between the two.

A higher deductible could save you money on a monthly basis (or bi-annual or annual basis if you pay in advance). By contrast, a lower deductible can help you recover faster in the event of an accident.

Your goal should be to figure out the best car insurance deductible for your situation. Considering these questions may help:

• Do you have emergency savings to cover repairs and other costs? With a higher deductible, you’ll have to cover a bigger portion of any repair bills that arise. If that’s a concern, a lower deductible is probably better.

• Is your household budget tight? If so, a higher deductible could help you save on your insurance premium. (Just make sure you can afford the deductible if necessary.)

• Have you been in car accidents or do you file other types of auto insurance claims often? If the answer is no, a higher deductible might not expose you to more out-of-pocket costs than you can manage.

• Are you comfortable with the financial risk that a higher deductible represents? If risk makes you nervous, a lower deductible might be better for your peace of mind.

• What is the value of your vehicle? If the insured vehicle’s value is low, a low deductible policy might make sense. However, the opposite could also be true.

Like a deductible, insurance coverage limits can also impact premium costs. An insurance limit, also known as a coverage limit or policy limit, is the maximum amount your insurance policy will pay for a covered claim. If you’re involved in an accident (or another covered event) that results in losses that exceed your coverage limit, you’re responsible for paying those costs yourself.

You can find details about your deductibles and insurance limits on the first page of your car insurance policy. This section is called the declarations page, and you can ask your insurance provider for a copy if you can’t locate yours.

Pros and cons of high and low deductibles

Here are some of the advantages and disadvantages of both high and low car insurance deductibles.

Pros of high deductibles

• High-deductible insurance plans tend to feature lower premiums. As a result, these policies may be more affordable.

• People who don’t file claims can see savings add up over time with a high-deductible, low premium policy.

Cons of high deductibles

• You might have to put off getting your vehicle repaired if you don’t have the cash available to cover your portion of the bill.

• A lender may not allow you to choose a high-deductible option if your vehicle is financed.

Pros of low deductibles

• You pay less out of pocket for covered damages, repairs and losses with a low-deductible insurance policy.

• The insurance company assumes more upfront risk in the event of a covered claim.

Cons of low deductibles

• A low car insurance deductible often translates to higher premiums, which could put added strain on your budget.

• You might be tempted to file claims for minor damages when your deductible is low, and frequent claims could lead to premium increases by your insurance provider.

Remember, there’s no one-size-fits-all solution when it comes to car insurance deductibles. Instead, your goal should be to find the right balance for your individual needs.

How deductibles affect premiums

To save money on your car insurance premium, raising your deductible can help. Decreasing your deductible, on the other hand, could have the opposite effect. Still, costs vary among insurance providers, your state, and from one driver to the next.

Below is a hypothetical example of a collision insurance policy from Progressive that demonstrates how the deductible amount you select impacts your auto insurance costs.

Keep in mind that deductibles are one way to manage insurance premiums costs but not the only way. You should also:

• Maintain a clean driving record.

• Look for car insurance discounts.

• Work to improve your credit.

• Shop around for insurance quotes regularly to find better rates.

• Bundle your car insurance with your homeowners insurance or renters policy.

As time passes, your insurance premiums may naturally decline with age.

Managing deductibles in insurance claims

Whether your insurance policy has a deductible of $0 or $2,500, the claim filing process begins the same way. If your vehicle is involved in a covered accident, you’ll want to contact your insurance company as soon as possible to file a claim. You should provide your insurer with any key information you gathered at the scene of the accident — contact information of the other driver(s) involved, pictures you may have taken, details from the police report, etc.

Next, your car insurance company will most likely assign an adjuster to investigate and manage your claim. The adjuster is responsible for communicating with you, other insurance companies, repair facilities, witnesses and any other parties. They will also review any estimates that you or the repair shops you visit provide.

If your adjuster approves your repair estimate, your carrier will issue a check to you or the repair shop. Remember, your insurance company will subtract any deductible you’re responsible for paying from this claim check.