If you’re thinking about purchasing car insurance in Toronto or anywhere in Canada, it’s important to understand all components of your policy. One such component is deductibles. Below, we explain what an insurance deductible is, how they work, and how deductibles can influence your car insurance premium.
What is a car insurance deductible?
When you purchase an insurance policy, not only will you have to choose what types of auto insurance you want your policy to include but you will also need to pick a deductible amount. Your deductible is the amount of money that you agree to pay toward an approved claim should an incident occur that you need to file a claim for.
As the policyholder, you are required to pay this amount before the insurance company steps in and issues a payout for the remainder of the costs, up to your policy limit. Thus, you can think of your car insurance deductible as a fee that is “deducted” from your total claim payout.
What is the purpose of a car insurance deductible, you may be wondering? A deductible is a way for your insurance company to alleviate the financial risk of covering you. Since deductibles are a form of financial responsibility that is assumed by the policyholder, the higher your deductible and the more responsibility you take on, the lower your premiums are likely to be.
For this reason, policyholders who choose no deductible policies or low deductibles often pay more for their car insurance plans. To find out how much car insurance costs per month, reach out to BrokerLink.
Similar to a premium, a car insurance deductible is something you pay for. Although unlike a premium, which you are required to pay either upfront on a yearly basis or on a monthly basis, you only need to pay your deductible in the event of a claim. For a detailed guide to insurance premiums and deductibles, check out our blog for more information.
How does a car insurance deductible work?
Now that you know what a car insurance deductible is, let’s consider how they work. Let’s say you get into a car accident, but you have collision car insurance. If the damage adds up to a much higher amount than your deductible, the best course of action will be to file a claim with your insurance company.
In this instance, you would only be responsible for paying your deductible, a relatively small portion of the cost of the damage. Meanwhile, your insurance company would cover the rest of the costs up to the policy limit.
There are usually two options for receiving a payout following a claim. First, your insurance company will determine the total cost of repairs. From there, they will likely let you choose between having your car repaired at one of their preferred auto body shops or going with an independent auto body shop of your choice.
In either scenario, you will be on the hook for paying your deductible amount. The only difference is the remaining amount that your insurance company will cover will either be paid directly to the auto body shop, should you choose to go with your insurer’s preferred shop, or will be issued to you and you will be responsible for paying the auto body shop that you chose on your own. Going with a preferred auto body shop may be more convenient. However, sometimes repairs at these shops cost more money.
Further, it is worth noting that not all forms of damage require car insurance claims, and thus for policyholders to pay deductibles. For example, if you get into a collision but the damage amounts to just $500 and your deductible is higher than that, let’s say you have a $1,000 car insurance deductible, you would be better off paying for the cost of the damage out of pocket rather than filing a claim and having to pay your deductible that’s worth double the cost of the damage.
Who chooses a car insurance deductible?
You do! The good news is that it is entirely up to you to decide what car insurance deductible you want to have for your policy. An insurance agent or broker can advise on what deductible to choose based on your driving habits and budget and explain the minimum and maximum deductible amounts that may be available. When choosing a deductible, you will also need to consider your risk level.
If you are extremely risk averse, then you might be inclined to choose a lower deductible amount, which means you won’t have to pay nearly as much money in the event of a claim.
Conversely, if you are less risk-averse and on a tight budget, you might pick a higher deductible amount that will lower your monthly premiums.
That said, although a high deductible will mean less money upfront, it will mean having to pay more money in the event of a claim. Regardless of what deductible amount you choose, remember that deductibles are essentially a form of self-insurance you agree to cover before your insurer covers the rest.
Why am I paying a deductible if I already pay for my insurance coverage?
Many people wonder why they are required to pay a deductible toward a claim settlement when they already pay for insurance coverage on a monthly or annual basis. What is worth remembering here is that although deductibles and premiums go hand-in-hand, they do serve unique functions. A premium is the amount of money you pay to your insurance company in exchange for active car insurance coverage.
When an insurance agent quotesyour premium, they will consider a wide variety of factors, such as your age, driving record, address, gender, local laws, and more. Another factor they will take into account is the deductible you choose.
In contrast to your premium, you can choose your deductible amount, not the insurance company. Further, the deductible amount is not required to be paid yearly or monthly like your premium. Instead, you will only need to pay your deductible if you file a claim.
Types of car insurance deductibles
Car insurance policies may come with multiple types of deductibles, as different types of coverage may have their own unique deductibles. For example, you could have a deductible that is unique to your collision coverage, comprehensive car coverage, all perils coverage, or even mandatory types of coverage, such as liability car insurance.
Depending on the province you live in, you may be required to choose a deductible, or at least have the option of choosing a deductible, for certain types of compulsory coverage, like uninsured automobile coverage. In this instance, you might need to pay a deductible if you were not found to be at fault for the collision.
It is worth noting that with any car insurance deductible, whether it be a collision car insurance deductible or a comprehensive car insurance deductible, you will have the freedom to pick what you want your deductible amount to be. For example, if you get into an at-fault accident that amounts to $5,000 in damage and you have a $1,000 collision coverage deductible, you can file a claim under this portion of your policy.
If approved, you will pay your $1,000 collision deductible and then receive a $4,000 payout from your insurance company to cover the remaining costs of the damage. Please note that policyholders are only responsible for paying the deductible that is associated with the type of claim you choose to file, e.g. a collision claim, a comprehensive claim, etc.
When do car insurance deductibles not apply?
There are a few circumstances in which car insurance deductibles may not apply:
First, if you get into an accident that you are not at fault for and the at-fault driver is known and insured e.g. it wasn't a hit and run or the driver wasn’t driving without car insurance, you should not have to pay a deductible in order to receive a payout.
Second, in some provinces, if you have comprehensive coverage and need to file a claim for a minor chip or crack in your windshield under your comprehensive coverage, your deductible may not be applicable.
Third, if you have enhanced coverage and your car is totalled due to a fire, lightning, or theft, your deductible may be waived by your insurance company (this only applies in certain provinces).
Is it better to choose a high deductible amount or a low deductible amount?
There is no right or wrong answer to this question. While some people enjoy the upfront cost savings that may come from choosing a high deductible amount, others prefer the peace of mind of a low deductible amount, knowing that they won’t have to pay much in the event of a claim.
What is worth knowing about high and low deductible amounts for car insurance is that the lower your deductible, the higher your premium, and the higher your deductible, the lower your premium.
Further, in most cases, the policyholder has the freedom to choose what deductible amounts they want. However, if you lease or finance your vehicle, then your lender may require you to purchase a certain deductible amount. Be sure to read the fine print of your leasing or finance contract if you have a leased or financed car.
At the end of the day, choosing between a high and low deductible amount can be a difficult decision. We recommend considering whether you would prefer to pay more: vehicle repairs or car insurance.
With a high deductible, you will end up paying more money toward vehicle repairs or other types of damages in the event of a loss, whereas with a low deductible, you will end up paying more money on a monthly or annual basis for your car insurance policy.
Do I have to pay a car insurance deductible every time I file a claim?
No. Policyholders are not always required to pay a deductible when they file a claim. Rather, you will only need to pay your deductible if you file a claim under a type of coverage that has a deductible.
If you aren’t sure whether a certain type of coverage comes with a deductible, review your auto insurance policy carefully. Listed in the terms and conditions will be a clear breakdown of the car insurance deductible amount you are required to pay in the event of a partially at-fault accident, a fully at-fault accident, or another type of incident, such as theft or vandalism.
Speaking of partially and fully at-fault accidents, it is worth noting that there are some situations where you will not have to pay your full deductible amount. For example, in the case of a collision coverage claim, you would only need to pay your full deductible amount if you are found to be 100% responsible for the accident.
Alternatively, if you are only found to be partially at fault for the accident (e.g. 50% at fault), then you would only have to pay 50% of your deductible toward the insured loss.
How much is a car insurance deductible?
As mentioned, car insurance deductible amounts vary because policyholders often have the ability to choose what they want their deductible to be.
That said, many insurance companies require policyholders to choose an amount that is between a minimum deductible and a maximum deductible.
The average car insurance deductible in Ontario is between $500 and $1,000. $500 is generally considered standard, though it might be too low for some people. Consider your risk level as well as the value of your car when choosing a deductible.
For instance, it may not make sense to have a high deductible of $1,000 or more on a decade-old vehicle that’s only valued at a few thousand dollars.
Does your car insurance deductible affect how much you pay for car insurance?
Yes. While it is not the only factor that will influence your premiums, it is one important factor that insurance companies consider. As you now know, higher deductibles equal lower rates, and lower deductibles equal higher rates.
Thus, if you choose a low deductible, you can expect to pay more for car insurance, and if you choose a high deductible, you can expect to pay less for car insurance. With this information in mind, you can bet that a car insurance policy with a $2,000 deductible will cost less than a car insurance policy with a $500 deductible.
The reason for this is that the higher your deductible is, the more financial responsibility you take on, which means that there is less risk for the insurance company.
Further, if you choose a higher deductible amount, you may be less likely to file a claim, especially if you get into a minor accident that results in damage that costs less than your deductible.
What other factors impact car insurance rates other than deductibles?
The deductible amount you choose is just one of many factors that will affect how much you pay for car insurance in Canada. Below is a list of some of the other important factors that have the ability to influence your premium:
- Where you live
- Age
- Gender
- Vehicle type
- How you use your vehicle
- Driving record
- Driving experience
- Past claims
- Prior insurance coverage
- Number of kilometres you drive
- Type of coverage on your policy
If you want to receive an accurate car insurance quote based on the information above, contact BrokerLink today. As brokers, we do not bind coverage but we can still provide you with a reliable quote that gives you an idea of how much a car insurance plan will cost you.
Disappearing car insurance deductibles
We’d like to take a minute to discuss disappearing deductibles, also known as vanishing deductibles. Disappearing deductibles are a type of endorsement that you may be able to add to your car insurance policy if you want to lower your overall premium.
How disappearing deductibles work is like this: For every year that you do not file a claim with your insurance company, your payment will be reduced by approximately 20% or another pre-determined amount.
If the amount is 20%, after five years of no claims, you may not have to pay anything unless you file a claim. Not all insurance companies offer vanishing deductibles, and even if yours does, not all policyholders are eligible.
Adding a disappearing deductible to your policy will significantly increase the cost of your overall premium, so you must be prepared for this higher price tag upfront. The good news is that if you succeed in not filing any claims in a year or more, you can save a lot of money on your insurance.
You may also end up paying less money out of pocket if you get into an at-fault accident. Speaking of at-fault accidents, learn how accident forgiveness coverage can help you avoid having your rates raised following your first at-fault collision.
Should I file a claim and use my car insurance deductible or pay for the damage myself?
It depends. There are certain situations in which it may make more sense for you to pay for the cost of the damage yourself rather than filing a claim and paying your insurance deductible.
Generally speaking, if the cost of the damage is less than, the same as, or only slightly more than your deductible, it may not be worth the hassle of filing a car insurance claim. For instance, if the cost of repairs is less than your deductible, then filing a claim may actually result in you paying more than you otherwise would.
It is also worth noting that the more claims on your insurance record, the higher your premium could be in subsequent years.
Thus, if the claim is minor and isn’t going to be more than your deductible anyway, it might be worth paying for the associated costs of the collision out of pocket.
Contact BrokerLink
Car insurance deductibles are complex. They’re also important, which is why you should never choose your deductible amount without knowing how it can affect you down the line. That is where BrokerLink comes in. For more insight into how deductibles work and how they influence premiums, reach out to BrokerLink today. One of our licensed insurance advisors would be happy to answer any questions you have about car insurance deductibles. We can also explain how mandatory car insurance works in Canada, such as third party liability car insurance, as well as what types of coverage do not require deductible payments.
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