Some TV commercials for car insurance make it sound like one company covers everything while its competitors don't, leaving their customers on the hook when they total their new car.
In truth, auto insurance is not a one-size-fits-all business. All insurance companies offer different products and levels of coverage according to the amount of risk a customer is willing to assume.
To understand auto insurance, you first have to understand that it is all about managing risk. With auto insurance, you manage risk through the deductible – the amount of a repair bill you are willing to pay when you file a claim.
The lower your deductible, the more likely you are to file a claim and the more an insurance company will charge in monthly premiums. That's because a low deductible increases the risk to the insurance company, which then compensates by charging a higher monthly premium.
Not the same impact in every state
A high deductible, on the other hand, means the customer is taking on more risk, and is rewarded with a lower premium. A study commissioned by insuranceQuotes.com measured how much lower premiums go in different states.
The study assumed the insured was a married and employed 45-year-old female driver with good credit and a clean driving record. It measured how much she would save, on average, after increasing her deductible.
In Massachusetts, increasing the deductible for our hypothetical driver from $500 to $1000 lowered the premium by 17%, the most in the nation. The smallest savings in the nation occurred in Michigan, where the premium dropped just 4%.
But everything changes when you boost the deductible from $500 to $2000. In South Dakota, our hypothetical driver would save 29% on her insurance premium. But the same deductible increase in North Carolina saved only 6%.
Monthly premium not the only factor
But the study authors make clear that a monthly premium reduction is not the only factor to consider when setting an auto insurance deductible. The deductible, after all, is the amount of money you are willing to pay out of pocket in the event of an accident.
In 2008, the Insurance Institute for Highway Safety (IIHS) pegged the average auto accident repair cost at $4000. It's a safe bet it is much higher now. But if you were presented with a $4000 repair bill and had a $2000 deductible, you would have to come up with half the cost.
If you have an emergency savings fund with $5000 or more in it, then taking on the risk of the higher deductible may well be prudent. But if you have no money in savings, you have to ask yourself where you would get the money to pay your share of the repair bill.
In that case, your better course of action may be to pay the higher monthly premium in order to get a low deductible.
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