Higher Deductible or Higher Premium? A Break-Even Analysis

Applying the Break-Even

With the high deductible, over 10 years you would save $4,000 in premiums. Each claim costs you an extra $1,000. If you file two claims in 10 years, you pay $2,000 extra and come out ahead by $2,000. If you file four claims, you break even exactly (four claims equal the $4,000 savings), and any more is a net loss. Most drivers file a claim far less often than once every 2.5 years, so the higher deductible is financially better for many, as long as they can afford it.

Claims affect future premiums as well. A claim can raise your rate for several years, which makes small claims less attractive to file. That in itself reduces the value of a low deductible.

Can You Afford the Deductible?

The saving only makes sense if you can pay the higher deductible without stress. If a $1,500 expense would force you onto a credit card at 24%, the cost of borrowing eats into the saving. A good rule is to keep the deductible within your emergency fund. Many people set the savings from lower premiums aside in a dedicated account, which effectively makes them self-insure the small losses and keep the benefit if no claim occurs.

For health insurance, the trade-off also involves an out-of-pocket maximum, the most you would pay in a year, and tax advantages like a health savings account with a high-deductible plan.

Different Types of Insurance

For auto collision and comprehensive coverage, deductibles of $500 to $1,000 are typical, and raising to $1,000 often cuts the premium by 10% to 30%. For homeowners insurance, deductibles are often 1% to 2% of the home's value, and raising them can save significant premium, though some storm deductibles are separate percentages. For renters insurance, the saving from raising the deductible is usually small. Liability coverage has no deductible; do not cut limits to save money, since liability claims can be very large.

Insurance is meant for rare, large losses. Use it for what you cannot afford to pay yourself.

Risk Tolerance and Other Factors

Consider your driving record, the age of your car, your neighborhood, and your health needs. A person with a history of claims or chronic health conditions might prefer a lower deductible. An older car with low value may not justify collision coverage at all: if the car is worth $3,000 and the premium for collision is $600 with a $1,000 deductible, the maximum payout is $2,000 and you are paying 30% of it each year. Compare quotes from multiple insurers, because price differences between companies can exceed the effect of deductibles.