Raising Deductibles to Save Money on Insurance: Does It Work?

One common, painful bill that we all face is the insurance bill. Whether you’re talking renters insurance, home insurance, or car insurance, the bill feels painful because it’s not something we can often directly see the benefit from. It just comes in handy when something goes wrong.

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One of the most common tactics that you’ll see in cost-cutting articles is calling up your insurance company and requesting an increase in your deductible – the amount you have to pay before the insurance kicks in.

On the surface, this works well. If you increase your deductible, your premiums (the amount you pay each month/quarter/year) will go down, meaning your monthly bills are lower. You can chip hefty percentages from your insurance bill just by making this move.

One of my long-time readers, Jeanne, has been writing to me about insurance this week. She has considered doing this, but something is convincing her that it’s not the best move:

I understand that raising a deductible will lower your premiums. But why do we have insurance in the first place? Doesn’t raising the deductible through the roof defeat the purpose?

The first thing to note here is that the purpose of insurance is to insure that you’ll survive financially due to an unforeseen event. We don’t have homeowner’s insurance because it’s fun – we have it because it will help us start over with a new home should our house burn to the ground. Without it, most of us would financially sink. The same goes for renter’s insurance – it’d be tough to lose all of your possessions in a fire without any way to recover. Again, with automobile insurance – if you total your car without insurance, you might be sitting holding just a car loan and nothing to show for it.

Obviously, if you have a ton of money, insurance on smaller things is a lot less important. People with huge bankrolls have no need to carry full insurance on their cars – they just cover the parts that might worry them or that they’re legally required to cover.

Saving money by raising a deductible assumes that you have the cash on hand to cover the deductible in such a situation. If you raise your auto deductible from $200 to $1,000, you’ll see a big drop in your bill, but if something goes wrong with your car, you’re going to need that $1,000. If you don’t have that $1,000 in an easy-to-access place, then you’re in real trouble.

The solution is simple: if you have a well-funded emergency fund in a savings account somewhere, you can raise your deductibles some without worry. A well-funded emergency fund means a minimum of a couple months’ worth of living expenses, plus more if you have dependents. If you have that kind of cash that can be accessed with ease, then by all means, raise your deductibles.

Won’t this cost me more in the long run? Many people who consider this ask themselves whether such a move will cost them more in the long run. After all, if they’re having to come up with a lot more money on each claim, are they really saving money overall?

The average homeowner makes an insurance claim once every nine years. If you raise your deductible on your homeowners’ insurance by $1,000, you only need to save about $120 a year in your premiums in order to create a net savings on average – and, likely, you’ll save a lot more than that.

Similar math exists for other types of insurance. The claims made are so infrequent that you only have to save a little bit on each insurance payment to make up for the additional cost on the deductible.

The key, though, is making sure you have the emergency savings to handle that higher deductible. If you don’t have that, make it a priority before you consider making changes to your insurance policies.

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  1. Stacey says:

    I think this works as well as every other savings tool – if you have the willpower to save the difference and build an emergency fund when you raise your deductable, you’ll likely come out ahead. If you don’t, you may find yourself stuck with a hefty bill during an emergency. Only you know how you’ll react with the money you’ve saved.

    Keep in mind that the lower your deductable, the more likely you are to file a claim – and the more likely it is that your insurance co. will raise your rates for filing claims.

  2. John says:

    An emergency fund is the most cost efficient insurance.

  3. chacha1 says:

    I’ve found that raising the deductible *does* help, a bit, but something else to consider is that if you have that $1000 saved up for a fender-bender, you can often skip making a claim altogether. As Stacey notes, if you don’t make claims, your regular premium rates stay lower.

    Of course, if *you* caused an accident you (or the police) are obligated to report it to the state, which will probably pass on the info to your insurer, which will then raise your rates. So being a careful driver is also wise.

    Likewise, homeowners are advised NOT to make claims for things like replacing a window broken by a tree branch crashing down in a storm – classifiable as a minor home repair.

    People who regularly make claims, even if the claims are small, will see their rates go up regardless of their deductible.

    And let’s not even get started on HEALTH insurance!!

  4. Jonathan says:

    One more thing to consider (especially with auto insurance) if whether or not you have historically made claims more/less often than average. We recently increased the deductible for our auto policies, saving a significant amount. We have only file one claim in the 12 years we have had coverage, so I feel that the odds are in our favor that we’ll save money in the long run by increasing the deductible. If we had made 3 or 4 claims during that same timeframe, it may very well have been more cost effective to keep the low deductible.

  5. Brent says:

    Also look at what you might be getting as your maximal claim. For auto insurance having a high deductible might not be all that far from scrapping the collision and comprehensive and just sticking to liability. Assuming that you have paid off the car that might make sense. a 4K car with a 1K deductible will only give you 3K and that’s if its totalled.

  6. Josh says:

    I’m on the other end of the spectrum here – I never see it as much of a plus to raise deductibles.

    I have asked my agent about raising the deductible in the past but it does not seem to be cost effective. Right now I’ve got the typical comprehensive plus 100/300 at a $250 deductible on my truck and it costs $55/mo. If I double my deductible, it knocks my bill down $6/month. So here the bet is that I won’t have a claim for 42 months? Seems like an awfully long time – I don’t think I want to take that bet…

  7. jgonzales says:

    With your car, if it’s financed, get Gap Insurance and raise the deductible. A little over a year ago I was in an accident that totaled my car. We had a $1000 deductible. The regular insurance company told us that we didn’t have to pay the deductible because it was totaled, they would simply subtract the deductible from the amount they paid our finance company. We had bought the Gap Insurance which covered the extra 5k or the insurance didn’t cover, including the deductible amount. It was literally no money out of our pocket.

  8. beth says:

    I’m wish #6 (Josh). I’ve looked at raising my deductible for auto insurance a few times, but it only saves a few dollars a month. (Like, seriously, less than $10 for 2 cars.)

    Having had an accident that was not my fault but was covered up-front by my insurance (while they work out the settlement with the at-fault driver), I really appreciated not having to cover a whole lot of deductible at the same time that I had to deal with medical bills (that were eventually reimbursed), rental cars (that were covered but still needed to auth my CC for the contract), replacing the car (which inevitably cost more than mine totalled for), new partial registration and smog fees, and replacing all of the little things that managed to disappear in the process (like screws for the license plates, my trunk storage basket, etc.). Having enough cash on hand for that is so worth an extra $6/month in premium.

  9. Moby Homemaker says:

    I worked in the insurance industry…one VERY IMPORTANT thing to note: a single claim on your Homeowners policy will more than likely raise your premium…and you could even get dropped.

    It was not always this way…but, the industry has changed.

    I think that should always be taken into account. Perhaps a large deductible will prevent you from filing a smaller claim that won’t warrant a dramatic increase.

    Obviously, a major claim is EXACTLY what we have insurance for.

  10. Colin says:

    I have to admit that this question is rather absurd. Absolutely no offense intended!

    Insurance companies have staff specifically there to determine risk and premiums. It is their *job* to do the numbers.

    Spending 15 minutes running numbers to out-smart such a company with dedicated people doing the same thing is just ludicrous on its face.

    It’s like trying to out-smart a car salesman: it’s *their* job to out-smart you.

    Sure, know what you’re getting into but don’t pretend your back-of-the-napkin calculations will out-smart an insurance company unless you know something they don’t (e.g., you want to have children so you drop your health insurance deductible). [And by "know what you're getting into" I am including the ability to cover a deductible should the need arise.] Always know what you’re getting into but challenging an “expert” is not something to do lightly.

  11. Josh says:

    If insurance companies’ numbers are so infallible and cut & dried, why do prices vary so much between companies for the same product?

    Insurance companies price based on actuarial assumptions. Calculating how much certain demographic factors impact claim dollars, or how to price policies to account for these factors and charge enough to remain profitable is complicated stuff. That’s why insurance companies hire staffs of actuaries.

    What isn’t complicated – and easily calculated on the back of a napkin – is my personal situation. I know that it will cost me $5 and change each month to up my deductible by $250. I also know, based on 16 years ‘ratings experience’ with myself that chances are good that I’ll be making at least 1 claim in a 4 year period, so the amount of money I save in premiums isn’t worth the lesser coverage.

    I don’t think anyone is trying to ‘outsmart’ insurance companies. It’s just about looking at your personal situation and determining whether your insurance costs make sense.

  12. Colin says:

    Josh, I never said infallible nor cut-and-dry so please don’t put words into what I’m saying. I said they have people who’s job is dedicated to running the same numbers you are. They have done it many more times than you.

    The question originally posed was “Does It Work?” and if it *did* work in the long run then the insurance companies would be out of business.

    Let me put it another way. The odds of a game at a casino are in favor of the house. If you play $5 blackjack then realize you could go play $1 slots then it’d certainly be cheaper to actually play but in the end the house still wins.

    I’m not going to repeat myself beyond saying that you should know what you’re getting into but I find it’s folly to think you will beat out an insurance company over the long term. It’s their business to not get beaten out, much like a casino.

    As an aside, I have the highest deductible on my Escort wagon because I’m required to have insurance but the car is worth so little that a lower deductible is nonsensical and a waste of money on premiums.

  13. Josh says:

    I think of it more in terms of a sportsbook:

    In most situations, the bookmaker sets its line to entice equal action on both sides and profit off the vig. That way no matter what happens with the game, they still make their 10%.

    Insurance companies set prices with the intent of ensuring that their block of auto policies be profitable as a whole, knowing they won’t ‘win’ on every single policy.

  14. Evan says:

    A few people already mentioned it but the decrease in my monthly premium wasn’t worth the increased pain I would feel if something were to happen. It is not that I wouldn’t have it, but I’d be a whole hell of a lot more pissed if I had to pay $1000 vs $500.

    Also just a heads up but depending on your situation you may not be allowed to play with these numbers. I know for my Wife’s leased car she has to have a $500 deductible, anything different would be violating the lease agreement.

  15. Leah says:

    I actually keep my deductibles low. I have the money to pay for it, but based on calculations, it saves me more right now to have the low deductibles, especially on my health insurance. My rates just got raised almost 10% from last year ($142 a month from the $130 a month last year). I get $1k of office visits before I have to pay my $5k deductible. They offered me an option to reduce my premiums down to $129 a month, but I’d get $500 less benefits than before. Um, thanks but no thanks. I pay more, but it has thus far been worth it both for peace of mind and finances. I have a solid emergency savings account, but I’m not able to save enough money to make it worth my while.

  16. deRuiter says:

    I carry high deductibles which saves on premiums. It is necessary to optimize your risk. If you have rental properties, for instance, never allow pets. A tenant’s dog bites a person, AND THE LANDLORD IS SUED BECAUSE THE TENANT OWNS NOTHING. No pets= fewer claimes= lower premiums. Have lease which allows you to evict for domestic violence, criminal activity, appearance of drug use or drug trafficing and prostitution. These are all activities which increase the risk on your property, so don’t allow them and your risk goes down. Keep everything in good repair and you have less chance of accidents. Keep things in good repair (real estate) and you will find it easier to get insurance. Obery traffic laws and there’s less chance of YOU causing an accident or getting a moving violation which raises your insurance. If you drive a clunker car, don’t bother with collision, put the money you’d pay for collision in a fund for the next clunker. Try to NEVER put in insurance claims, particularly small ones, it’s cheaper to absorb small claims and not have insurance company raise rates or drop you. A minor amount to fix something is a one shot deal. A raise in rates if every year.

  17. deRuiter says:

    I forgot! IT IS VITAL TO HAVE “UNINSURED MOTORIST” AND “UNDERINSURED MOTORIST” coverage on YOUR car. So if you are hit by someoene with no insurance, you get all your bills paid. “Underinsured motorist” is most commonly not found on policies, and it is a sad, frequent occurrence to be hit by someone with the state minimum insurance and have to pay bills yourself. Call your agent today and make sure you have uninsured and underinsured motorist coverage, also “domestic servant” insurance on your real estate in case an unlicensed,, uninsured worker is injured on your property. I’d rather pay for these three things than pay for a low deductable. The less contact you have with your insurance company, the lower your costs will be.

  18. getagrip says:

    All this assumes your car is even worth the deductable. I’ve known people who’ve kept their collision insurance on vehicles not worth a $1000 emergency fund simply because they never reviewed their policies from time to time.

    Also, while I appreciate that some folks, because of their individual circumstances, don’t see much back by raising their deductable, in my case, I felt it was worth it. So you really need to check your individual case and then make the decision.

  19. John says:

    I belive never insure only what you can’t afford to pay for yourself

  20. Dave C says:

    I just dropped comp and collision coverage on my 01 Maxima (worth 4-5k) last night to drop our total bill about 25%, so I’m getting a kick out of these replies.
    /beaters FTW

  21. Amanda says:

    If you have a family were fender benders are more common (teenagers, etc.) than the lower deductible can be worth it.

  22. Scott says:

    I’ve mentioned this before, but before you raise your health insurance deductibles, you should make sure you would be happy with that deductible amount for potentially the rest of your life…because it can be very hard or impossible to lower them later, especially if a new medical condition pops up in the meantime. And since you would now have a new condition, it may not be an option to switch providers either, because they will exclude the “pre-existing condition” altogether.

    Just because you are healthy now, and don’t see a need for a low deductible, don’t be too short-sighted in thinking that might change.

    This may not be the case with large corporate group insurance policies, but it is definitely the case with individual policies.

  23. SLCCOM says:

    #22 Scott is right. You also can’t lower your health insurance deductible if you are in a high risk pool.

    Honestly, though, I am suspicious when the INSURANCE COMPANY suggests that you drop your collision and comprehensive. As has been pointed out, the house always wins, and when the HOUSE is advising something, I question it. On our old cars, the collision and comprehensive is very cheap. So I keep it.

  24. SLCCOM says:

    Scott is wrong on one thing. If you have health insurance and get a new condition and your health coverage is continuous, a new provider cannot refuse to pay for the new condition as “preexisting.”

    Not that they might not try….

  25. JuliB says:

    I have an 01 Camry Solara – bought it new and hope to have it another 10 years. I have full insurance although I paid it off years ago. Book value is 4-6K, but it’s in fabulous shape.

    The deductibles are $1000. I wanted to lower it to $500, but I would have to make an appt with a service, take the car there, and they would inspect it first. I understand their rationale, but I see it as a waste of my time (and money, if time = money). So now I contemplate dropping comp/collision all together, and going with just liability, or leaving it as is.

    The point is, if you want to take on more risk, it will be a hassle to push it back on to the same insurer if your financial situation changes.

    Since making a change in insurance is far down on my list, I will probably continue with the status quo for another year or two until the car’s value drops even lower.

  26. Insurance is nothing more than a gamble, no way around it.

    If you don’t have it, you are simply gambling that you won’t get sick.

    If you do have it, then you’re insurance company is gambling that you won’t.

    Adjusting your deductibles is nothing more than “hedging your bets” in one direction or the other.

  27. Scott says:

    @SLCCOM

    so if they ARE trying, how would one go about showing that they “cannot” do so? Where are you getting this info?

    My parents are in this situation. The way I understood it, lowering the deductible would trigger a health assessment, much like if you were a new applicant.

    I would love for someone to show me where it says they “cannot” do so.

  28. SLCCOM says:

    Scott, this applies to people who were covered under group insurance policies. The legislation that applies is HIPPA, and as long as they had group insurance, the health insurers must issue individual policies if they are not eligible for any group plans or Medicare or Medicaid.

    I can’t see anything about if they can do another health assessment if you lower your deductible. I would advice your parents to call their state Department of Insurance to see if that is legal. The companies will cheerfully cheat if you don’t let them know that you know it is illegal. (Sadly, it may well be legal.)

    Your parents may be eligible for the state high risk insurance pool; they should investigate that as well.

    This really does show how choosing a high deductible can backfire later.

  29. Tamarah says:

    I saved about fifty dollars a month by doing this. I raised my deductable to $1000 a month and have been putting away the $50 a month. I do have a well funded savings account as well.

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