One of the most common recurring costs in your life is likely to be insurance. From auto insurance, to health insurance, to home insurance, you pay every month to protect your assets.
While many people acknowledge the importance of insurance, no one likes to premiums. If you want to reduce your costs, one of the best ways to do so is to boost your deductible.
What is a Deductible?
Your deductible is the amount of money you pay out of pocket before the insurance actually kicks in to cover costs. The higher your deductible, the lower your premium, since the insurance company won't have to pay as much of your cost for an incident.
Boost your deductible, and you will find that your monthly cost drops. I reduced my health insurance premium by half, just by boosting my deductible by a few thousand dollars. The more you are willing to pay out of your own pocket, the lower your premium will be — and the more you can save each month.
Do You Have the Money for a Higher Deductible?
Another issue you run into is that you might not have the money for a higher deductible. My deductible on my health insurance is $7,500 right now. What if you have a $20,000 deductible on your house? Yes, you'll save on premiums. But what if you have an incident, and you have to come up with that money? If you are going to raise your deductible, you need to have that money available, just in case.
This means that you need to create an emergency fund. Indeed, if you want the capital to meet your deductible obligations, you really do need to build a good emergency fund. If your auto insurance policy has a $5,000 deductible, you need at least $5,000 in your emergency fund. I use my Health Savings Account as a sort of emergency fund to cover my out of pocket health expenses. There are limits to how much you can contribute each year, but you can eventually build up what you need, and supplement further with a different emergency fund.
Without an emergency fund, you can actually end up in financial trouble when something happens and you need to pay out of pocket. Before you decide to increase your deductible, it's a good idea to get a solid start on building an emergency fund. That way, you will have the cash you need to pay out of pocket without breaking the bank.
You don't need to have a complete emergency fund to start, but you need to have a plan. One way to improve your ability to build your emergency fund is to bank the savings. I started an emergency fund, and then raised my deductible by a little bit more. I banked the savings as part of the emergency fund. Then, I raised the deductible a little bit more, and banked the savings. You are still paying the same each month, but you get to keep more of the money, since it is going in your bank account, rather to the insurance company.
Make sure you examine the cost benefit ratio. My auto deductible is $500 because even if I raise it to $1000 I will only save $10 every 6 months. I’d have to go 25 years without a claim in order to save that amount of money from raising my deductible so I don’t do it.