How to Choose a Deductible

When it comes to saving money on your auto or homeowners insurance policies, one of the quickest ways to reduce your monthly premium is to raise your insurance deductible. But that can be a tricky decision that’s a matter of savings versus psychology.

Before you sign up for the highest possible deductible, you would be wise to consider just how much you’d save on your rates and whether you are financially and emotionally prepared to part with your cash if you do have to make a claim.

The math on deductibles, by insurance type.

While the psychological quandary of raising your deductible depends on your tolerance for risk, the math to calculate your potential savings is simpler, though it varies by insurance category.

Auto insurance. You are not always saving a lot on your premiums with a higher deductible on an auto insurance policy.  For example, on a 2010 Toyota Prius, you would save about $24 to $30 annually by raising your comprehensive insurance deductible from $250 to $500. If you had to make a claim, it would take you years to recoup that extra $250 through premium savings.”

The amount you can save with a higher collision deductible depends on factors, including your age. If you are a mature 50-year-old driver with a clean driving record, you might only save $20 to $30 per year on your auto insurance premiums by raising your deductible from $250 to $500. But if you are a younger driver, you might be able to save as much as $250 or $300.

Home insurance. Brown says that the differences in premiums when you raise the deductible for a home insurance policy are relatively small. You’d save around $85 per year by switching from a $200 to a $500 deductible and save around $80 annually by switching from a $500 to a $1,000 deductible.

In the end, it’s your call.

Some people are not comfortable with a high deductible for any insurance because they don’t want high out-of-pocket costs for something that’s not their fault, such as an accident caused by the other driver or storm damage to their home.

But the premium savings from a high insurance deductible could allow you to build up a larger emergency fund in the bank.