Car Insurance Premiums and Deductibles

A car insurance premium is the amount that gets paid on a consistent basis (some people schedule them monthly, others quarterly, bi-annually, or yearly). It gets paid whether to ever make an insurance claim or not. Now some might think that this doesn’t sound like a good idea at all. It is true that you could pay hundreds of dollars in car insurance premiums over your lifetime and never once get anything back from the insurance company. On the other hand, most of society accepts this as a price worth paying in order to protect oneself from the danger of losing the entire value of a vehicle all at once. The idea behind insurance is that everyone pays premiums according to certain actuarial calculations that take into account statistics such as your vehicle’s value, the driving record for people of your age and sex, any prior accidents you’ve been in, and any prior insurance claims that you have made. This is supposed to roughly gauge the likelihood of you needing a certain amount of money in an insurance settlement. When everyone pays into the coffers of an insurance company in anticipation of one day filing an insurance claim if an accident ever occurs, it is based on the principle of spreading out the risk. If a large group of people each takes on the responsibility for the collective amount of insurance claims that will be made, the risk can be handled in a very consistent and stable manner as opposed to “rolling the dice” so to speak.

The other major aspect to most car insurance plans is the deductible. The deductible is the amount an individual would owe if they are filing a claim and no one else is found to be at fault. For example, if you and another driver each make a mistake and an accident results, then you will likely each be found 50% responsible and only have to pay your own deductible. If your deductible is $500, that is all you will have to pay even if there is $5000 worth of damage to the vehicle. Most people consider this a fair system. Deductibles are put in place to prevent people from flooding insurance companies with claims on small scratches and/or dints. This saves the entire insurance group money in the long run. If you are found 100% responsible for an accident you will likely have to pay two deductibles. One to cover your insurance policy (and cover the claim for your car and/or medical bills etc.) and one to cover that of the person you hit.

The rough rule or relationship between car insurance premiums and deductibles is that the higher premium you choose to pay each month, the lower the deductible will be in the case of an accident. This makes sense when you think about in terms of consistent payment vs risk relation. Remember that this is only higher or lower premiums in relation to your specific situation. Someone who is 40, has never been in an accident and drives a 10-year old vehicle is going to pay less for their premium than someone who drives a sports car, is 21, and has a shoddy driving record.

It is considered common sense amongst personal finance experts that you will be likely save money in the long run if you always choose the lowest premiums and “invest the rest.” This stems from the actual business structure of an insurance company. See what car insurance companies do is take the premiums you pay out every month, quarter, 6 months, or year, and they invest it. They invest in a huge variety of things, but they pay you out of this pot of money. Because they don’t need all of the cash on hand at any given time (unless the most chaotic of circumstances hits) insurance companies are able to take a fair amount of risk with their investments. This allows them to make money in the long run. If you simply apply the same principles to your personal financial situation chances are that you will come out ahead. If you take the amount that you would have spent on monthly premiums, and simply invest it, then you experience the average amount of vehicle damage over your lifetime, you would in theory be further ahead. In reality, there is no way to tell what sort of fortune you will have behind the wheel, and if you can’t take a big deductible hit in the event of an accident (remember, if you opt for the smallest premiums you will get the largest deductibles by default), then this is not a viable option for you. You need to be able to rest easy at night knowing that in the event of a deductible you will not be financially crippled.

When you are comparing insurance companies you need to make sure that the car insurance premiums and deductibles you are looking at are specific comparisons for your unique situation. There is plenty of variation between insurance provider depending on how they calculate risk for your unique car insurance needs. This is why it is essential to shop around if you want to have the least amount take out of your bank account periodically for premiums, in addition to paying out the lowest deductible in the event of a collision or other insurance claim.

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