To determine how much car insurance you can afford, you must understand what a deductible is and how it works. When buying car insurance, you must consider both the premium and your deductible when determining your budget for coverage.

What Is a Car Insurance Deductible?

Definition
A deductible is the amount of money you must pay out of pocket before your expenses are paid on a claim.

When you have an accident, your car insurance company will pay for damages up to your policy’s limit. Regardless of whether the accident is severe, you will only need to pay your auto deductible.

NOTE: Remember that deductibles do not apply to liability auto insurance coverage, as that pays for damages incurred by another driver when you cause an accident. Instead, it would apply to coverage types that pay your damages, such as collision or comprehensive coverage.

Subrogation and Your Car Insurance Deductible

If you are involved in an accident with another driver and the the fault is not immediately apparent, you may be advised to file a claim with your auto insurance company to get your expenses paid sooner.

If, after the accident investigation, it’s determined that the other driver caused the accident, your insurer will generally try to get back the money they paid on your claim. This is called subrogation.

If your car insurance company successfully recovers the money paid for your claim, they may reimburse you for your deductible.

Choosing Your Deductible: Low vs. High

If you’re on a tight budget, you may consider lowering your auto insurance payment by increasing your deductible. However, this cost-cutting measure may not always be in your best interests.

A higher deductible will result in slightly lower monthly car insurance premiums; however, you need to realistically assess how much you’ll be able to pay if you get into an accident. Remember, car accidents can happen at any time, so you must determine whether your current budget would allow for a very high deductible payment.

If you don’t have easy access to these funds in your emergency savings, you may have to resort to measures such as a high-interest personal loan or a cash advance on your credit card. In all likelihood, both options would cost you more than you’d save on your premium.