Whether you have had insurance before or this is your first time, you will have to think about what kind of deductible you want. But what is an auto insurance deductible exactly? How does a deductible affect rates and how does it differ depending on if you buy an old or new car? We are here to make it simple for you.
A deductible is the amount of the claim you pay out of your own pocket. It is the self-insured retention portion of your policy. Put another way: a deductible is how much risk you are willing to take on yourself. An insurance company will cover you for accidents, but a core principle of insurance is that you also take on a minimum amount of risk so that you can help in preventing accidents from happening. If deductibles didn’t exist, there would be greater incentive for us to all go out and crash our car.
A standard or suggested deductible for car insurance is $500 or $1000. Approximately 95% of consumers will have one of these two deductibles. Having a much higher or much lower deductible is rarely ever seen in Ontario. This makes your decision rather easy.
The higher your deductible is, the lower your premiums are. For example, if you are paying $2000 per year for your auto insurance and you moved your deductible from $500 to $1000, you might expect to save around $50 per year.
If you are looking to make your insurance premium rates as low as possible, we would recommend a $1000 deductible. If you are more concerned about being more fully covered or if you don’t want to pay a high deductible if an accident occurs, we would suggest a $500 deductible for your car insurance. It’s your choice when considering car insurance deductible vs. premium.
What should a new car deductible be? This is up to you, but it may also be up to your finance company. If you are leasing or financing your new car, they may require your auto insurance deductible to be a specific number. Again, this is usually either $500 or $1000.
An old car deductible gets a little more interesting. Let’s say you buy a car for $1500 as a winter beater, or maybe as your first car. Having a $1000 deductible will only get you a $500 cheque if your car is totalled. In this case, you may want a lower deductible.
To take it a step further, do you want to receive a cheque at all if you crash your old car or if it’s stolen? If the answer to this is “no,” then you should delete your Optional Coverage entirely. Then a deductible is a moot point because you are not covering yourself for any collision or theft.
The question you should always ask yourself is “if my car is in an accident or stolen, what am I willing to pay for a new car and can I afford it?” The answer to this question will tell you whether you want a high deductible, low deductible or no coverage at all.
Your deductible can also play a factor on if you decide to make a claim at all. For example, you have a large crack in your windshield or get into a fender bender and the damage is $800. If you have a $1000 deductible, you can’t even make a claim because anything under $1000 you pay out of pocket.
If you had a $500 deductible in this instance you might want to make a claim and collect $300 to cover the repairs. You can offset this with the potential impact on your rates increasing by making a claim. A good broker will guide you through your options if this happens.
It’s important to note that deductibles are generally only for Collision and Comprehensive Coverage. We’ll talk about what these coverages are in another article.
Also, the same thinking applies to your home insurance deductible or business insurance deductible.
Our advice is to pick the highest deductible you can while still being able to afford to pay it if there is an accident. If you go with this advice, choosing a deductible is easy. And if you have any questions, feel free to contact us! We'll happily guide you through the process.