Does High Deductible Car or Home Insurance Actually Save Money?

Does High Deductible Car or Home Insurance Actually Save Money

You can actually lose yourself money if you’re not careful!

Of course going with a high deductible car or home insurance will save you money, right?  I mean, I’ve read it on dozens of money-saving blogs, so it must be true!!

Intuitively it makes sense, take a higher deductible on your car or home insurance plan if you’ve got cash sitting in the bank to cover that potential emergency, and you can start saving today!  There’s only one catch – many times you can actually lose money in the long run.

Read on to find out how!

Shopping for Cheaper Car and Home Insurance

We begin our story with me, if you’ve been following along with my July goals for money saving, you’ll see that I’m trying to move from State Farm to Geico.  I figured I could save upwards of $550 by making the switch.

We’ve all heard dozens of times that you can save money by taking the car or home insurance plan with a super-high deductible.  As I was going through the quote process, I decide to move up our car insurance deductible from $250 to $1,000 on comprehensive and $250 to $500 on collision.  With our home insurance deductible I decided to move from $1,000 to $2,500.  Great, I’m saving tons of money I thought!!!

I went over the savings and deductible info with my wife one evening before pulling the trigger to switch, and guess what happened?  She completely freaked out with the increasing deductible amounts!  OK, no problem I thought.  I will just need to put together a simple little chart or table to show her how beneficial it would be for us to up the deductible, and we could begin raking in the savings.  Well, it wasn’t exactly that simple…

 

Looking at the Data for Car Insurance Deductibles

Let’s start with the car insurance data first.  There are two types of insurances that we need to get for her 2004 Toyota Sienna Van: comprehensive and collision.  Comprehensive covers: hail, fire, wind, flooding, vandalism, volcanoes, etc.  OK, I made that last one up.  Collision covers if you hit someone else’s car or get hit and their insurance is non-existent or doesn’t cover it.

The table below shows the car insurance rate breakdown for our vehicles (1997 Camry and 2004 Sienna).  Pay attention to the first row, this is the base case of a $50 deductible:

Monthly Cost Type Comprehensive Deductible Collision Deductible Comp. Break Even (years) Coll. Break Even (years)
 $55.66 Base 50 50  - -
 $52.21 Low Col 50 250  - 4.8
 $53.90 Low Comp 250 50 9.5 -
 $50.45 Current Deductibles 250 250 9.4 4.8
 $48.96 High Col 250 500 - 14.0
 $49.10 High Comp 1000 250 46.3 -
 $47.61 High Comp & Col 1000 500 46.3 14.0

I calculated the number of years to break even by taking the increased deductible amount and dividing by the savings you get each year.  In the case of increasing the collision deductible from $50 to $250 this would equal: ($250-$50)/(($55.66-$52.21)*12) = 4.8 years.

Can my wife and I make it ~5 years without an accident to the van that we would have to pay for?  Probably, we’re pretty safe drivers overall.  Can we make it ~10 years without having hail, fire, vandalism damage?  Maybe, but it could be a bit more of a stretch.  We haven’t had any real issues with this so far based on our location, so we’re probably OK.  So, let’s go ahead and adjust the deductible up to $250 for both comprehensive and collision.

Now, let’s see how far we can stretch our hard earned money!  Say we want to up the collision deductible from $250 to $500 and the comprehensive deductible from $250 to $1000 to save an extra ~$3 a month.  Can we make it 14 years without a collision or 46 years without hail, flood, fire, and vandalism?  This would be very unlikely indeed!

In the long run with high car insurance deductibles, if we went with any deductible much  above $250, we would probably have an actual event and end up LOSING MONEY!!!  My wife was right… how could this be?!?!?!?

Looking at Data for Home Insurance Deductibles

Alright, this one was a no-brainer (or so I thought).  Going with a high deductible here just made sense on an intuitive level to me because we’ve never had any hosing insurance claim.  Let’s look at the table and see what it shows.  Pay attention to the first row, this is the base case of $1,000 deductible (Geico wouldn’t let it go any lower).

Annual Cost Yearly Savings Type Property Deductible Years to Break Even
 $674.00  –  Base 1000 -
 $639.00  $35.00 Low Deductible 1500 14.3
 $589.00  $85.00 High Deductible 2500 17.6
 $500.00  $174.00 Max Deductible 5000 23.0

The years to break even here is calculated in just the same way as the car insurance example.  Take the difference in the two deductibles divided by the annual savings.  In this case to compare a $1,000 deductible to a $1,500 deductible the math would be: ($1,500 – $1,000)/($674-$639) = 14.3 years.

So, in order for us to actually be saving money in the long run we’d have to go more than 14.3 years without a claim to actually pocket any savings.  Sure, we’d be saving $35 a year, but if anything happened, we’d have to shell out the extra $500 on the spot.  Is it really safe to assume that we won’t have a claim in more than 14 years just before we actually start saving money?  This seems like a pretty border-line case to me.  I’m having a hard time making up my mind.  We’re still mulling this one over, but I’m guessing we’ll end up deciding to go with the $1,000 deductible.

 

Final Thoughts

I have two main thoughts to leave you with:

  • This whole analysis tells me is that over the long run, I probably won’t really be saving any bundles of cash by adjusting the deductibles in my favor.  The main savings will come from the differences in rates between insurance companies.  Switching from State Farm to Geico is still saving me about $370+ a year, so it’s definitely worth my time to look into all of this.  I was initially hoping to save ~$575 with the high deductible options through Geico – oh well…
  • In this case, my wife’s gut instinct was spot on here with the high car and home insurance deductibles.  If you’re shopping around for insurance to get the best prices, please take the extra 10-minutes to make sure you will not actually lose money in the long run by setting your deductibles too high for your particular situation.

 

 

Comments

  1. Tim Waters says

    The insurance companies want those with higher deductibles to have accidents or at least make claims – they reap the benefits so they make it look far more attractive in the short term. This if course is my opinion and not fact. But it certainly feels to me that way.

    I am going to actually lower my deductible on my house – sure my premium will go up slightly, but I have already reaped the benefits for two years.

    • says

      Yeah, I feel that it’s a very big misconception that going with a higher deductible will actually save you money in the long run. Heck, I was brainwashed to believe it!

  2. says

    I am still on the fence about this one. For years we paid the higher insurance costs with the lower deductible and never went to the doctor or hospital except for regular checkups and preventive care. So of course we switched our plan and we now have a higher deductible. We will have to just see how things go.
    Thomas | Your Daily Finance recently posted…Real Estate Investing How Do I StartMy Profile

  3. MN says

    I just did something similar with Geico. I pay a single installment for 6 months at a time. So, maybe the monthly payment option skews things to get numbers more like you showed but I’m getting break even points around 8 yrs when going with highest deductible for each ($1000) which seems to make it much more realistic.

    • says

      Yeah, going with the 6-month payment you save ~$40 a year I’ve found.

      8-years for break even? Do you think you can go that long without even a minor accident? I do not think I could…

      Just recently someone tapped into my wife’s van at like 3 mph and cracked the rear bumper. The total repair costs were ~$1,400 and 4 days of car rentals!!!! Luckily their car insurance paid for everything. Just something to consider, especially if you’re not driving a beater :-)

  4. Nightvid Cole says

    You are overlooking the fact that if you do make a claim, your premiums could rise by a significant amount. Even if it doesn’t take the full 14 years before you use it, you could still save money by having high deductibles since you would avoid filing a claim since you came out of pocket for the whole thing. And then the rise in premiums that *did not* happen would be added to your previous monthly savings, resulting in savings enough to more than cover the out-of-pocket cost of the accident/incident.

    In the long run, the high deductible IS cheaper, once you do a thorough analysis which accounts for this effect.

    • says

      NC,

      Great point – I did overlook this fact. All I know is that about four months after writing this article a huge deer randomly ran into the side of my car while I was on my way to work. This caused ~$2,500 worth of damage. I’m glad that I didn’t go with the higher deductible amount or I really would have been out a ton of money :-) So I guess I accidentally made the right choice for this random event!

      • Brandon says

        Yep, but now, you have made a claim $$$. The insurance company now knows that you make claims. It costs more to insure you. I also hit a deer. I did not make a claim. I still do not make claims. I will get better rates than you for the rest of my life.

        • Brandon says

          It is my personality type, I believe. I only buy insurance because I legally have too. I don’t sue people either. I don’t go after insurance companies for my mistakes. It doesn’t seem right. Part of your premium pays for people that take advantage of insurance.

          • Brandon says

            Also, with the new health care laws, when you buy insurance, you are paying for all the employees of the insurance company to have health insurance. Its a legal expense, and the costs must be passed on. Are you sure you really want to buy all that?

        • says

          Why do you have insurance if you never intend to make a claim? You must have the minimum insurance required by law? In this case, they told me because I was not at fault, it would not “go on my record.” Not sure if that is true or not…

Trackbacks

  1. […] Some of the most common personal finance advice that you’ll run across suggests that you should take out the highest deductible possible that save yourself money every month. Well, I decided to take my own information and run some numbers. I looked at the difference on car insurance with a $50 deductible, $250 deductible, and a $500 deductible on both comprehensive and collision. You can check out the details in a post I created here: Does High Deductible Car or Home Insurance Actually Save Money? […]

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