Before you run off to your insurance broker or agent to make changes to your policies, it is important that you understand how premiums and deductibles work.
The higher your deductible, the lower your premium will be. That is because increasing your deductible means you are putting more skin in the game or risk for a potential event or claim. In other words, your out-of-pocket expenses will be more when an event occurs.
Conversely, having a low premium means you have a smaller degree of financial exposure for an event or claim BUT your premiums will be higher simply because the insurer is taking on more risk.
Once you have grasped the relationship between risk and premiums, you can look at quick and easy ways to trim your budget. These two insurance policy deductibles can be changed rather quickly through your agent or broker:
- Auto insurance: Lowering your auto insurance may save you the most out of these two examples. Before my wife and I wised up, we had a small $500 deductible. However, we had very few claims on the policy. We raised our deductible to a $1000. This saved us hundreds of dollars annually. Be careful, make sure you do the math first. If you are having wrecks every year, then raising your deductible and forking out $1000 to $2000 a year is not worth it. In addition, having an emergency fund is great insurance for funding the deductible.
- Home owners insurance: Increasing your home owners insurance deductible may not save you as much as your auto insurance but it can save a few hundred dollars. My wife I had a $500 deductible and then raised it to $1000. Since our home owner insurance premiums were taken out of our home mortgage escrow account, increasing the deductible lowered our monthly mortgage payment by $25-$50 per month. Once again, if you are having claims every year, it may not be worth raising the deductible.
Increasing your home owners and auto insurance deductibles is a quick an easy way to save money. Extra money in your budget means more money to pay off debt, save, or invest.
Question: What other quick and easy ways can you save money?