Paying monthly insurance bills, whether it’s for a home, renters, or auto insurance policy, is one of life’s least enjoyable chores.
Not only is it an expense we often see little return on, but the cost of car insurance, in particular, has been increasing for years—with the largest insurers increasing their average car insurance premiums between 2.3% (Nationwide) and 15.38% (Travelers) in the last three years.
The good news is that if you’re able to sock away more money in an emergency savings account, it’s possible to save on your monthly insurance costs without taking on much more risk. This approach hinges on increasing your insurance deductible, which in turn should bring down the premiums you pay month after month. Here’s a closer look at this strategy and how it works.
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The Logic at Work
Your insurance deductible is the amount of money you’re required to pay out of pocket in the event of a claim before your insurance kicks in. For example, if your deductible is $500, and a fender bender causes $2,500 in damage to your car, you pay the first $500 and the insurance company covers the remaining $2,000.
By raising your insurance deductible, you’re agreeing to take on more of the financial risk in the event of a claim: Double your deductible in the above example, and you’d owe $1,000 while the insurance company would pay $1,500.
In exchange for this increased risk, you’ll often pay lower monthly premiums for your coverage, explained Misty Lynch, CFP, and head of financial planning at John Hancock Digital. This typically holds true for products like auto, home, and health insurance.
In the case of car insurance, in particular, a 2016 study found that increasing a deductible from $500 to $1,000 reduced premiums an average of 8.5% across the country. Those making a bigger change, shifting deductibles from $500 to $2,000, could save an average of nearly 15%.
But the key to making this shift without taking on too much risk is to build up your emergency savings account so you can easily cover the higher deductible.
Action Items: Laying the Groundwork
If you opt to increase your deductible to save money on insurance, it’s best to set aside the new deductible amount in an emergency savings or checking account.
For instance, if you increase your homeowners insurance deductible from $1,000 to $2,000, then you need to make sure you have $2,000 you can readily access, said Brandon Tritten of JBLB Insurance Group.
“As an insurance professional I make sure I’m clear about what it means to increase your deductibles,” Tritten added. “Sometimes a person sees ‘savings’, but they don’t have enough money set aside for their deductible. So, increasing their deductible doesn’t make sense.”
Before making such a change, it’s also a good idea to shop around and carefully run the numbers, ensuring the savings from an increased deductible are truly worth it, adds Paul Moyer, founder of SavingFreak.com.
“I live in South Carolina and if I were to increase my homeowners deductible from $500 to $1,000, it will drop my premiums about $120 per year,” explained Moyer. “This means that I have to go just over four years without a claim for that difference in premiums to pay off.”
“Whenever I advise someone on raising their deductible, I tell them to make sure they get new quotes from multiple carriers, compare the rates for their current deductible and the larger deductible and do the math to make sure the extra risk isn’t bringing such a small premium decrease it will not likely benefit you,” added Moyer.
And finally, along with bulking up your emergency fund, if you increase insurance deductibles it’s a good idea to stay up to date on routine maintenance, whether it’s a home or car, says Tritten. Take the time to engage in preventative measures.
“Sometimes you can deter claims with a little time and elbow grease,” said Tritten.
Advantages of a Higher Deductible
The biggest advantage of increasing your deductible is the savings you’ll see over time, says Clint Haynes, a certified financial planner and owner of NextGen Wealth.
“It can add up to hundreds of dollars every year, and thousands of dollars over a lifetime,” said Haynes. “This is something I always recommend to my clients when going through the financial planning process. As long as they have enough saved in their emergency savings account and are able to ‘self-insure’ themselves up to a $1,000 deductible for auto and possibly even higher with homeowners, then they can typically save in the 10% to 20% range on their annual premiums every single year.”
Using This Tactic for Disability Insurance
Establishing an adequate emergency fund can also save consumers money on disability insurance, says Raymer Malone, a certified financial planner and owner of High Income Protection Insurance Agency.
With such policies, the deductible is essentially time, Malone explained.
“Known as a waiting period or elimination period, your policy won’t begin paying benefits when you’re unable to work for a predetermined number of days,” Malone explained. “The typical disability insurance policy has a 90-day elimination or waiting period. However, one can normally select an option as short as 30 days or as long as 365 days, in some cases even longer.”
Without an emergency fund, an individual living paycheck to paycheck may opt for a shorter waiting period, perhaps 60 days. Alternatively, someone who has six months of expenses socked away in their bank account, may instead be able to opt for a 180-day waiting period on disability insurance, which will translate into a less costly policy.
“The savings on a disability insurance policy with a 180-day wait can be almost 50% less expensive than one with a 60-day wait,” said Malone. “Those with the resources to opt for a longer elimination period will see substantial savings on their policies over those who don’t.”
The Bottom Line
Increasing your deductible to save money on your monthly insurance premiums requires taking on a certain amount of risk, something you should be mentally and financially prepared for.
“You need to determine where your comfort with risk is,” Tritten said. “How much are you willing and capable of handling on your own?”
In addition, it’s a good idea to think carefully about how likely you are to file a claim, adds Lynch, of John Hancock Digital.
“If you feel there’s a low risk of needing to use your coverage, a high deductible plan might work well for you,” she said. “However, choosing a high deductible plan could be an expensive mistake if you need to use your insurance often.” For example, even if you have enough extra savings set aside to cover your $1,000 car insurance deductible in the event of an accident, you could get stuck if you need to file another claim just a few months later.
Still need help deciding whether this approach makes sense for you? Talk with an independent insurance agent, said Tritten, who can help determine if increasing your deductible, in conjunction with an increased emergency savings account, could be beneficial for you.
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Mia Taylor is an award-winning journalist with more than two decades of experience. She has worked for some of the nation’s best-known news organizations, including the Atlanta Journal-Constitution and the San Diego Union-Tribune.