Limits and Deductibles are the two components that greatly affect your auto insurance policy premiums. Therefore you can benefit most by understanding what these are. You can also strike a balance between your insurance benefits and your policy premiums by adjusting your Limits and Deductibles.
Definition of Limits and Deductible
A Limit is the maximum amount that an auto insurance company will pay for in the event of an accident.
A Deductible is the amount of money which you (the insured) must pay before the insurance company's payout begins. For example, a typical auto insurance policy may carry about $500 deductible. If a car owner gets into an accident, he has to foot the first $500 of the damage while the rest of the cost is borne by his insurer.
Insurance companies include a deductible in their auto insurance policy to avoid paying out on relatively small claims. This is only practical as the administrative time and cost of a small claim far outweighs the benefits of payout.
Deductibles also vary by company and type of coverage. Different auto insurance companies offer different deductible options, and the amount you save by selecting a higher deductible will also vary by company.
How Do Limits and Deductible Affect Auto Insurance Premiums?
With higher Limits, your auto insurance company bears a higher risk. This is because the insurance payout is higher -- therefore your insurance premiums will increase. Similarly if the Deductibles are lower, the insurance company (instead of the driver) has to pay more when you make claims. Obviously they’ll have to increase the insurance premiums too.
If you feel you need a high level of coverage but want to reduce your premiums, you can save money by opting for higher deductible. However you need to understand that you’ll be paying more out of your pocket in the event of a claim. For this reason, you’re also advised to set aside a similar amount of money so that you can pay for the deductible amount in order for your auto insurance company to compensate you.
Deductible is only characteristic to some types of auto insurance. You’ll only need to decide your deductible options for Personal Injury Protection (PIP), Comprehensive coverage and Collision coverage. Deductibles are not applicable to Liability Insurance, Uninsured Motorist Coverage and Underinsured Motorist Coverage. Therefore there’s no need to evaluate your deductible options for these types of auto insurance policies.
By understanding your auto insurance needs, you’ll be able to derive a plan for policy limits and deductible options. From this, you can easily find a balance between your insurance benefits and what you pay for.
Finally, it may also be helpful to know that you have the right to adjust your auto insurance coverage and policy limits at any time, even if you’re not near your renewal date. If you adjust to a lower policy limit, opt for a different deductible option or cancel non-mandatory coverage, you can (and should) request your insurance company to refund for the unused premiums.
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