Q&A: WHAT CAN YOU TELL ME ABOUT AUTO INSURANCE DEDUCTIBLES?

Deductibles are the portion of the claim you are willing to pay. The higher the deductible, the less the insurance company has to pay, so they don’t need as much premium.

Choose the highest deductible you are comfortable with. Some people don’t want to worry about having to pay anything if they have an accident, so they choose $100 deductible. They will pay a higher premium because they are letting the insurance company cover more of the risk. Others would rather pay less premium to the insurance company so they choose to take on some of the risk and pay less premium.

Are you and your wife accident prone. If you have had a few accidents in the past, you might want a lower deductible. If you have not had any accidents or just one in the past, then it is worth it to you to have a higher deducible. If you have high liquidly, and you could come up with a $1,000 to cover the deductible in an accident easily, then choose the higher deductible. If you would have trouble coming up with the $1,000, choose a lower deductible.

There are two deductibles on your auto insurance policy. One is for collision and the other is for comprehensive. Collision is when you run into someone or someone runs into you and leaves the scene. Comprehensive is when your windshield is cracked when hit by an object on the road,(like a stone,) or a deer runs in front of your car. I usually recommend to my clients to take $1,000 deductible on collision and $100 on comprehensive. I like the lower deductible on comprehensive because today’s cars have windshields that are much more expensive to replace. Nothing is more annoying than to have a small stone crack a windshield,(something totally out of your control,) and you have to come up with $1,600 to replace it. With $100 deductible on comprehensive, you just pay $100 and the insurance company pays the rest.

So, here are four rules to follow when it comes to homeowners and car insurance.

1. Don’t try to cover the first dollar of loss, but insure against the larger catastrophe.
2. Don’t cover risks that will have little impact on your wealth, happiness, or success.
3. Have an insurance expert on your side to help you design the policy to fit your financial life situation.
4. Save the recaptured premium to help pay future premiums.

Number 4 is the least understood by most people. I advise my clients to save the difference. For example, if your annual insurance premium with $100 deductible is $2,500 and with $1,000 deductible is $1,500, take the $1,000 savings and put it in an account somewhere. Now each year you are saving $1,000 of premium you did not have to spend because of the higher deductible.

Here is how you use the money. In the example above, take the $1,000 savings and put it in a Muni Bond mutual fund (federal tax free in most cases) at the beginning of the year. At the end of 10 years at a 5% rate of return, for example, the account will have $13,206. Of course we know, insurance premiums tend to increase by small amounts each year, but in this example, you would have paid $15,000 in premiums and have accumulated $13,206 in the mutual fund. Most people don’t save the premium difference, but you can see, in this case, you have saved almost as much as you spent. Now if you want, you can use the Muni Bond account to subsidize future premiums, or just keep saving the difference. Secondly, if you have an accident a the end of the first year, you have $1,000 in the Municipal Bond mutual fund, so you now have the money to cover your deductible.

The same thing applies to homeowners as well. The only difference is there is no comprehensive coverage on a homeowners policy. The higher deductible, the less premium you pay,