The Deductible

By Author: Norris Rios
Total Articles: 572
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Insurance while driving is one of these legal mandates that makes common sense. It all comes down to a question of financial responsibility. Most of our law is based on the idea you should always pay to put right whatever you do wrong. So if you are careless and damage the property of a friend while visiting, you are expected to pick up the bill for its repair or replacement. It could be just a few dollars when you knock over a bottle of beer. It might be more serious if you break an expensive vase. Either way, as a guest in someone's home, you would usually feel honor-bound to make good on the loss.

Now put yourself behind the wheel of a vehicle. You mess up, coming round a bend too fast and fail to stop in time, crashing into the rear of a truck carrying expensive vases. The law says you should always be carrying a minimum amount of cover to pay for the damage you cause. In this, the lawmakers are reasonably generous. They know not everyone holds cash in a bank to cover these losses, so they make insurance mandatory. If the minimum is not enough, you are still liable to pay the difference. Should you have assets or ...
... a reasonably good pay check coming in each month, you could find yourself on the wrong end of a law suit.

So this should make you ask two different questions. First, how much insurance cover should you buy? The answer to this, like all good legal questions, is "it depends". If you have no assets and earn very little, it's uneconomic for anyone to sue you, so you might take the practical view that the minimum is enough. But if you have a good job and you are doing well enough to have positive housing equity, it's worth carrying a lot more than the minimum to protect your home and any other assets.

The second question is how big a deductible you should accept. The insurance company tempts you into accepting up to $1,000 of any claims by giving you a discount. In these hard economic times, it can look a good deal to accept the maximum deductible. It takes some of the pressure off the family budget when the premium rate comes down. But let's say you agree to pay the first $1,000 of any claim, can you afford it? Remember life is not always fair. In the accident, you damage your own vehicle. You are looking at the bill to repair it, plus the $1,000 on the deductible. Can your credit cards soak up all this as a lump sum? When you add in the interest payments on this extra borrowing, which was the better deal? Paying a few dollar a month more on the insurance policy, or hitting your credit cards with all this grief?

In the right circumstances, buying an auto insurance policy with the maximum deductible can be the right decision. Indeed, with cash so tight, it may be the only way you can afford it. But always remember to look at the worst case scenarios. Like there never could be two accidents in the same year, right? Buying auto insurance is all about taking on the risks you can manage.