I wrote about how to choose a deductible. Here is the equation we came up with. Choose a higher deductible over a lower one when:
In general, I recommend higher deductibles over lower ones. A $1,000 deductible might seem like a lot, but if it saves you money over the long term in premium savings, you’ll be better off.
The only question now is: where do you get the money to cover your deductible?
The question of how to pay for your deductible is important. Remember that the deductible transfers risk from the insurance company back to you, so this is an expense that you need to be prepared for. You don’t know when it will happen, and there’s a chance it might never happen, but it probably will, at least at some point. Therefore, this requires preparation.
Without preparation, you will have an incident and then pay for your deductible on your credit card. That would be a terrible move. Because in addition to having an incident, now you also have debt, and probably finance charges as well. Bad plan.
Use your emergency fund
There are lots of reasons not to dip into your emergency fund. (Holidays are one of them.) But I’d say that in this case, a deductible-hitting incident is such a case where using an emergency fund is acceptable.
As I’ve talked about before, your emergency fund (minimum of $500, optimally equal to six months of bills and expenses) is for real emergencies, things that you do not expect. A car accident is never expected, even if you know it’s likely to happen.
(If you’re particularly diligent, you could create a separate fund just for car expenses, which could be enough to cover this. But using your emergency fund is perfectly acceptable. Basically, anything aside from a credit card or your retirement fund is perfectly acceptable.)
What you are doing, in effect, is “insuring yourself“. Being able to pay for the unexpected is just like being your own insurance company. That is a good position to be in.
For my recent hit-and-run (or slip-and-slide), my deductible (which ended up being covered under an “Uninsured Motorist Property Damage” claim, the details of which I still don’t quite follow) was $300, which I was able to cover in my car fund (which I have hereby styled as the Mutual Insurance of Mike Company).
Eventually, if we all keep working the plan I talk about on this site, I believe we’ll be able to insure ourselves against practically anything. But for now, the deductible will do.
But enough about me. Could you cover your deductible now?