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Can you afford your auto insurance deductible?

One of the easiest ways to structure a cheap auto insurance policy is to buy a policy with a high deductible. Deductibles are the amount that you must pay out of pocket when you have an insurable incident in your car. If the cost of repairing your car doesn’t exceed your deductible, then there is no insurance benefit to be paid out.

When you first get your auto insurance quote, you might be so excited about the low-cost premium that you may not be actually considering whether or not you can afford to have such a high deductible. Here are some steps to help you figure out whether or not you can actually afford that deductible.

Do you have the amount of the deductible saved?

If you have money saved and the amount of the savings exceeds your deductible, then you may be able to afford the deductible. It is important that you are able to continue contributing to the savings accumulation too. If not, then you could risk losing all that you worked so hard to save without having the possibility of replenishing it.

Will you suffer penalties for withdrawing it?

The account or investment vehicle in which your savings is held is another factor in determining whether or not you can afford the deductible you have. If your savings is in a CD, annuity, retirement account or other investment that charges you a penalty for withdrawing the money before maturity, then you may not be able to actually afford the deductible. You should have the cash to meet your deductible readily available and should suffer no penalties if you withdraw it.

How long will it take to re-accumulate?

Chances are good that you don’t want to use your savings for car repair and never get it back. Generally, when people save money they want to use it later for vacations, emergencies like a job loss or retirement. Before you choose a high deductible auto insurance policy, make sure you have the ability to save the money all over again after you use it.

Do you still have money saved?

The car repair expenses that follow an insurable incident might not be the only emergency you face during a set time period. If you use all your emergency savings for the car repair, then you could have no money available for other emergencies if they occur simultaneously. Make sure that you have more money saved in your emergency account or through other accounts than your deductible. That way you won’t have to borrow money and pay interest just to pay for car repairs.

Never assume that the worst won’t happen to you and that your deductible isn’t a real expense. An accident with an uninsured driver or of your own fault can happen and when it does, you need to make sure that paying your deductible doesn’t set the rest of your financial house out of order.

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