Insurance Premium vs. Deductible: How Are They Different?

Your car insurance rate contains several different components.  Two of the main components that you need to understand are your premium and your deductible.  Basically, a premium is the rate that you need to pay to maintain car insurance. Your deductible, on the other hand, is the amount you must pay if your vehicle is damaged before your auto insurance will kick in and pay the rest.  Keep reading to find out more about the difference between a car insurance premium and a deductible. 

What Is a Premium and How Is It Calculated

Your car insurance premium is the amount that you pay for your auto insurance.  Your insurance rate after your discounts have been factored in is your premium. The amount takes into account a number of factors which include your driving record, your location, your vehicle, your age, your marital status, your credit score, your coverage options and limits and your deductibles.  You must pay your premium in order to have any auto insurance coverage.  For example, if your auto insurance premium is $1,500 per year, you have to pay the entire amount as agreed upon to be assured that your auto insurance company will pay out on any auto insurance claims that arise. 

You can choose to pay your insurance premium upfront for the full-year, for 6 months, or monthly. If you choose to pay your premium on monthly basis, you have to make sure you pay your premium on time. If you missed your premium payment, your car insurance can be cancelled and the consequences can be very expensive: your car insurance rates can be increased and your license can be revoked.

Regardless how you choose to pay your insurance premium, you must pay the premium before your insurance policy starts.

>> MORE: Where Can You Get Cheap Car Insurance with No Deposit?

What is a Deductible

A deductible is an amount that you must pay out of pocket before your insurance coverage starts to pay out if your vehicle sustains damage in an accident or due to another cause.  Even if you have coverage, the auto insurance company does not have to pay out on any claim until it exceeds your deductible. You are responsible for paying the deductible amount for your repairs before you can take possession of your repaired vehicle. 

A deductible normally accompanies both your comprehensive and collision coverages.  They tend to range from $0 to $1,000. For example, you may have a $500 deductible for both comprehensive and collision and $20,000 in coverage limits for both.  If your vehicle were to sustain $1,500 in comprehensive damage, you have to pay $500 out of pocket before your auto insurance will cover the remaining $1,000 for the repair. 

More about deductible:

How Does Your Deductible Affect Your Premium

Your deductible amounts are one of the factors that affect your premium.  Having higher deductibles generally reduces your premium rate. On the other hand, lower deductibles tend to cause your premium rate to be higher.  Therefore, you want to select a deductible that you are sure that you can pay if your car were to be damaged, but one that is not so low that it makes it difficult for you to pay your monthly premium.

Final Thought

Between your premium and your deductible, it is far more important for you to pay your premium in order to ensure that you actually have auto insurance.  However, you also have to be able to pay your deductible if you want to get your car back from the auto repair shop after you have been in an accident. Thus, having moderate deductibles will help to keep your premium rate lower while being affordable when you need repairs.


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