Deductibles and premiums explained

What is a deductible, and how does it affect your premium?

When you shop for insurance, you’ll notice two numbers: your premium and your deductible. Understanding how they work together can help you choose the right policy. Let’s take a closer look at what these numbers mean.

What is a deductible?

A deductible is the amount you pay out of pocket before your insurance covers a claim. For example, with a $500 deductible on a $2,000 repair, you pay $500 and your insurer pays the rest. If the repair is $500 or less, you pay the full cost.

What is a premium?

A premium is the price of insurance for a policy period. You pay it whether or not you file a claim. Think of it like a subscription: It keeps your policy active so it’s there when you need it.

How deductibles and premiums work together

When it comes to insurance, your deductible and premium are directly connected. They’re essentially two sides of the same trade-off.

In general, a higher deductible means a lower premium: You pay less each month, but more out of pocket if you file a claim, since you’re taking on more of the risk. A lower deductible means a higher premium: You pay more each month, but less out of pocket, since the insurer takes on more of the risk.

Here’s a simple way to think about the one policy structured in two different coverage selections:

• $500 deductible: Higher monthly cost, lower out-of-pocket cost if you file a claim
• $1,000 deductible: Lower monthly cost, higher out-of-pocket cost if you file a claim

At the end of the day, this decision comes down to when you want to pay more:

• Now, through a higher premium
• Or later, if you need to file a claim

There is no one-size-fits-all answer. It’s more about finding the balance that works for your situation.

Choosing the right deductible

There are a few things to consider when deciding which deductible is right for you.

1. What’s your budget? Ask yourself if you could afford the deductible outright if you had to file a claim tomorrow. If covering a higher deductible would be a stretch, a lower deductible may give you more peace of mind, even if it raises your premium.
2. How often do you expect to use your insurance? While no one plans to file claims often, your vehicle use can be a factor. If you take your vehicle off-roading every chance you get, you might expect to file a claim more often than someone who uses their vehicle for a short commute. The more claims you expect, the more your deductible matters. Other factors might include where you live, how often you use your vehicle and what purpose the vehicle serves.
3. What’s your risk tolerance? If you like the assurance that you won’t have to pay a larger amount if you need to file a claim, then a higher premium may feel better for you. If you don’t mind the potential of paying more, then saving on your premium may be your best option.

Ultimately, choosing policy terms that fit your life matters most. Consider your personal preferences, budget and vehicle usage to help determine which policy makes the most sense for you. Want to see what policy options you have with a company you already trust? Get a quote with General Motors Insurance to see how much you could save.

By Lincoln Edgemon, GM Financial

Lincoln learned how to drive in a GMC Sierra and has been a fan of large vehicles ever since. She's committed to clarity in communication that helps others on their journey toward financial literacy.