How do car insurance deductibles work?

A car insurance deductible is the amount of money you pay out-of-pocket before your insurance company kicks in to cover the remaining cost of certain repairs to your vehicle following an accident.

Your deductible is applied each time you file a claim—unlike health insurance, where you pay an annual deductible.

When purchasing a car insurance policy, you can typically choose your deductibles for specific coverages. Most car insurance providers will provide options for your deductibles—$250, $500, and $1,000 are typical.

Here’s a hypothetical example of a deductible in action:

Let’s say you hit a slippery spot while driving, and slide off the road and into a telephone pole. You file a claim, and the damage to your vehicle is determined to total $3,000. Your collision insurance will help pay to repair your vehicle. Your deductible is $500, which you pay directly to the repair shop. Your insurance company will then cover the remaining $2,500.

Your financial situation is often the biggest factor to consider when choosing your deductible.

It’s a risk/reward situation. Choosing a higher deductible—like $1,000—is one way to get more affordable car insurance payments each month. But a deductible like that would leave you vulnerable to a large one-time expense following an accident.

If you’re not in a position to spend that amount of money all at once, you may want to err on the side of caution and opt for a lower deductible. Just keep in mind, your monthly payments would be a little higher to balance out your lower deductible.

Other things to consider when selecting your deductibles include:

• Accident and theft rates in your area

• The value and age of your vehicle

• Whether your lender requires certain deductibles

• Comprehensive

• Collision

• Personal injury protection (PIP)

• Uninsured motorist property damage

Keep in mind that liability insurance—which is required in nearly every state in the country—doesn’t involve deductibles.