What About The Deductible?

By Author: Marcus Stalder
Total Articles: 491
Comment this article

We need to go back to basics to understand what the decision really means on the deductible. The idea of insurance is very simple. If you don't have a policy, you carry all the cost of loss. That means, if anything goes wrong, you pay out of your own pocket. Think of this as self-insurance. But, if you belong to a group that shares the cost of loss, this can save you money. Let's say you insure your vehicle along with several thousand other people. Not everyone will have an accident so, when it comes to dividing up the cost of replacement or repair among all the members of the group, you all pay less than if you were uninsured and had an accident. Everyone pays a little, but the unlucky ones claim back a lot. This is a great system. For those of you who like politics, it's a perfect example of socialism in action. It redistributes money collected by the group to those who need it most.

For those of a libertarian persuasion, belonging to a communist conspiracy like this is outrageous. But then consider the reality. In all but three states, it's mandatory for all drivers to carry insurance. The politicians in these states ...
... have insulted the people by forcing a socialist plan on to them. Worse, these politicians do it in the name of financial responsibility. The argument goes as follows. In our great country, we have a rule that if you are at fault, the courts can order you to pay compensation to everyone you have injured. As a government, we discussed whether to pass a law forcing you to save money just in case you get sued. That would mean, every year, you have to produce your bank account to show a minimum amount in place. The government decided this infringed your liberty. Everyone should be free to spend as much of their money as possible. But you would be financially irresponsible if you do not have some money available just in case you're sued. So making you pay a few dollars a year to carry insurance is the least invasive way of protecting your privacy.

To give everyone the chance to stand up for their political beliefs, the idea of the deductible was introduced. This is your option to self-insure. You can agree to pay the agreed amount against every claim on the policy. So, assuming you have the cash in hand or access to sufficient credit, you can agree to pay the first $1,000 of every claim, no matter how many claims there are or how frequently they arise. Of course, the auto insurance companies are not the most trusting of business organizations, so they always want to see the color your your money before they pay out. Now comes the question. If you were really unlucky and had three claims against you in quick succession, do you have $3,000 in cash to pay the deductible? Sure we know this is a once in a lifetime risk but do you want to take it? Or, perhaps, you have no choice. Given the mandate to buy an auto insurance policy, agreeing to a high deductible may be the only way you can afford the premium.