InsuranceYak.com

February 14, 2008 3 Comments

Physical damage coverage for auto insurance is broken down into two parts:

• Collision coverage: Paying for damage to a vehicle caused by hitting another object (tree, curb, vehicle) regardless of fault
• Comprehensive (AKA Other than Collision): Covers most other accidental damage to the vehicle: vandalism, theft, fire, hitting animals (people are considered animals), glass, wind, hail, falling objects.

When filing a claim, the policy deductible must be paid up-front by the insured.  Back in my insurance agent days, one of the most common discussions I had with clients revolved around deductibles.  

When helping people choose the  right deductible, I brought up two points to consider:

1. Cost-effectiveness (premium savings  vs out-of-pocket)  & monetary ability to pay the deductible.
2. The emotional ability to pay the deductible.

 Monetary considerations and determining payback

First thing to ask yourself: How often to you have accidents? Since  most of my clients were low-risk drivers, on average every 4-6 years they would turn in a claim.  For younger or urban drivers, the claim period would probably be once every 3-4 years.  So in order for the higher deductible to be worthwhile the payback period would have to be shorter than the average claim frequency (listen to me I sound like an actuary).

Payback = Additional deductible paid (additional risk) / savings 

My insurance company offers deductibles of $250/$500/$1000. So figuring their customer service has nothing better to do, I called and got premium numbers from my auto policy.

Here is a spreadsheet I borrowed from another insurance agent.

My current policy has $500 deductibles for Comp. and Collision. Studying the above chart, it would make sense for me to lower my Comp. deductible to $250 and raise my collision deductible to $1000.

This makes monetary sense, but brings me to my second consideration:

 Emotional considerations of a deductible

When it comes time to file a claim, some people cannot stand the emotional strain of parting with money.  I had one client who was a multi-millionaire. This guy has enough money to replace any of his vehicles with petty cash.  Nonetheless, he kept physical damage coverage on all his vehicles even when they were more than 10 years old.  He also kept $250 deductibles (that was the lowest we offered) because paying money after a wreck tore him up. There was some psychological aspect that kept him from parting with money if he had an accident.  I’m in a similar situation. For me paying a $500 deductible after an accident is all I can stomach; that’s why I don’t raise my deductible to $1000, even if it makes sense financially.

Auto Insurance

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