How to afford a higher insurance deductible
We all need some type of insurance. If you want to protect your car, home, life, recreational vehicles, a vacation home, or the lives of your loved ones, you need insurance. Although different types of insurance policies protect different assets, all insurance policies have similar characteristics, including the idea of the deductible.
An insurance deductible is the amount of money you pay out of pocket before the benefits from the insurance company kick in and start to pay for the costs incurred to repair or replace your assets.
Why would someone choose a higher insurance deductible?
At first, it may seem that a lower insurance deductible is advantageous because the out of pocket costs will be lower if you file a claim. However, the truth is there are also several reasons to consider a higher deductible on your home and auto insurance policies.
Opting for a higher deductible with your insurance means that your annual costs will be lower. If the insurance company has to pay less money on your claim because the deductible is higher you will see savings every month, improving your cash flow.
What's the benefit of a higher insurance deductible?
Lower insurance premiums mean you save money each month on your overall personal expenses. According to The Simple Dollar, "If you increase your deductible, your premiums (the amount you pay each month/quarter/year) will go down, meaning your monthly bills are lower. You can chip hefty percentages from your insurance bill just by making this move."
How to minimize costs with a higher insurance deductible
One thing to keep in mind is that the entire purpose of insurance is to ensure an unforeseen event doesn't wipe you out financially. A higher deductible means that you will have more out of pocket expenses if you file an insurance claim.
That may not sound like a good idea because no one likes to have high out of pocket expenses, but when it comes to insurance there are a few ways you can financially prepare for an unpredictable event such as damage to your home or car as well as your personal belongings.
Put your savings aside
If you increase your deductible to lower your insurance premiums, you should have extra money in your pocket every month. Enjoy those savings, but don't spend them. Instead, put the extra money aside in a low risk investment such as a high interest savings account. As your savings grow, you can use that money to pay for the out of pocket expenses (like the deductible) if you file a home or auto insurance claim.
Build up your emergency savings fund
Having cash on hand to pay for your out of pocket expenses is a good financial idea. Emergencies such as floods in your home or accidents with your car can cost a lot of money and you may need to pay for some emergency expenses before you're able to contact your insurance company. Having an emergency savings fund helps avoid getting into debt if you need to file an insurance claim.