How does a car insurance deductible work?

If you've ever shopped around for car insurance, at one point or another, you've probably asked yourself "what is a deductible?" or "how does a car insurance deductible even work?" We thought that such a common question deserves a proper breakdown. Why not bring back the basics and cover your most commonly asked car insurance deductible questions. Let's get started.

What is a deductible?

When you choose an insurance policy, you agree to a deductible amount and a premium — these are both costs that you agree to pay. In short, deductibles are the dollar figure that you're responsible for paying upon settlement of an eventual claim — the deductible is effectively “deducted” from your total claim settlement (hence the name). On the other hand, your premium is what you pay in exchange for the coverage of the policy you choose.

Deductibles provide a way for your insurer to transfer back some of the risk associated with insuring your vehicle, which allows them to offer you a lower premium compared to what you’d have to pay with no deductible. Not all claims are subject to a deductible though, but we'll cover this in more detail below.

How does a deductible work?

Let's consider what happens in a car accident for which you have coverage. If the damage inflicted costs significantly more than just your deductible amount, you'd only be responsible for paying out the deductible (smaller portion of the damage), whereas your insurer would cover the amount of damage in excess of your deductible — sounds like a good deal, right?

Here's an example: Your vehicle is damaged in an at-fault accident, and you're unsure of how much the damage will cost you. You do, however, know your policy states a $1,000 Collision deductible, so what happens next? Regardless of who your insurer is, let's talk about 2 ways that you can handle this situation.

Option 1: Your insurer first confirms the total cost for repairs. In this instance, they determine that your repairs will amount to $10,000. You communicate to the insurer that you'd prefer to take your car to your local mechanic. Since your policy states a $1,000 deductible, they will send you a claims cheque for $9,000 to cover the cost of repairs.

Option 2: Alternatively, you could choose to take your vehicle to a preferred repair shop , typically offered as an option by your insurance company. In this case, once the repair costs are finalized, the insurer would pay for the damage directly to the repair shop and you will be responsible for paying your $1,000 deductible once you pick up your vehicle.

Let's now consider what would happen if the damage inflicted is valued at less than your deductible. If, for example, your at-fault accident causes damages worth $500 and you have a $1,000 deductible, you'd then be responsible for covering the damage from your own pocket — without the involvement of your insurer. That means any amount of damage less than the deductible amount would be your responsibility to repair and pay for.

If, for example, your car is a Total Loss and therefore cannot be repaired, you would work with a Claims Advisor who will present you with your vehicle’s value. Then, typically, your insurer would send you a claims cheque for your Total Loss amount, but whether you need to pay your deductible or not will depend on the nature of your loss and/or any specific coverages that could waive the deductible amount.

Who decides my deductible?

You do — your insurer will provide you with options and will likely suggest a minimum deductible and a maximum deductible that you can choose from. But ultimately, you can pick which deductible works best with your current situation. This will also depend on the risk level you're willing to assume, of course. If you choose a lower deductible, you'll pay the lesser portion of your potential claim, but respectively, your car insurance premium cost will be slightly higher. And if you choose a higher deductible, you'll pay less for your car insurance premium, but should you have a claim, you'll have to pay more out of pocket for damages. Regardless of the deductible you choose, you're agreeing to self-insure up to a certain limit before your insurer kicks in their portion of coverage. This mutual agreement between you and your insurer helps keep costs fair and creates a win-win situation between both parties.

Why do I have to pay a deductible if I'm already paying monthly/annual car insurance premiums?

Something to remember is that although deductibles and premiums work hand in hand, they do serve separate purposes. Your premium is essentially what you pay to your insurer to have coverage and to keep your insurance policy active. When determining your premium, your insurer will take many factors into consideration, one of them being your deductible, or the portion you agree to pay in the event your vehicle is damaged.

Now if something happens and you do have to file a claim, you would be expected to pay your deductible (if applicable) per the agreement between you and your insurer.

What are the types of deductibles and when do I have to pay them?

Different types of deductibles typically come into play when you choose to opt into additional coverages on your policy. This could be Specified Perils, Comprehensive, Collision, or All Perils coverage.

Depending on the province you live in, you may also have a deductible (or the option of a deductible) on one or more mandatory coverages, such as Uninsured Automobile Coverage or Direct Compensation Property Damage, meaning you may need to pay a deductible even if you're in a not at-fault accident.

For the most part, you’ll have the option to choose a deductible that works best for you, with the expectation that you would pay that amount in the event of a corresponding claim type. Let's consider an example: You've unfortunately gotten into an at-fault accident, but luckily, you know you're covered under Collision coverage. Your policy indicates a $1000 Collision deductible and a $500 Comprehensive deductible. In this instance, if you proceed to file a claim, you would need to file one under your Collision coverage and will be responsible for paying the $1,000 Collision deductible. The Comprehensive deductible would not apply and would not need to be paid out since you did not file a claim under that specific coverage. That means you only pay the deductible that is associated with the claim you choose to file.

When would my deductible not be applicable?

If you're wondering what specific situations you may encounter that may not require you to pay a deductible, consider some of these scenarios:

1. If you get into a not-at-fault accident and the third party (at-fault driver) is known and insured (assuming you have not opted for a deductible for Direct Compensation Property Damage).

2. If you're a TD Insurance customer of 10+ years without any claims that has fully benefitted from our TD Insurance Decreasing DeductibleTM feature, which reduces your Collision or All Perils deductible by 10% each year you’re claims-free. (By the 10th claim-free year, you could have a $0 deductible.)

3. If you're a TD Insurance customer and have our Grand Touring Solution® (a feature that extends your coverage to rental cars and more). Should you experience a Total Loss or a Hit & Run, TD Insurance will waive your deductible amount (conditions apply).

4. If you file a claim under Comprehensive coverage for a chip/small crack in your windshield, provided it can be repaired (province dependent).

5. In certain provinces, if you have the additional coverage, and you experience a Total Loss due to fire, theft or lightning, your deductible may be waived.

Deductibles may be another factor to consider when purchasing insurance and when filing claims, but they are put in place to help you. No matter your financial situation, TD Insurance will be able to work with you to find the best coverage for your needs.