How Much Should Your Car Insurance Be? Here’s What Dave Ramsey Thinks

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Do not set the car insurance deductible without reading these tips.


Key points

  • Car insurance comes with deductibles, the amount that must be paid out of the insurance fund before the loss is covered.
  • Financial expert Dave Ramsey recommends a $1,000 deductible for most people.
  • Drivers can also check to see how long it will take for deductible changes to clear.

Auto insurance provides the most important financial protection. Car insurance will show the amount of losses that the driver will face if something goes wrong, due to damage, due to theft, or any other damage.

In addition to choosing which types of auto insurance to buy, motorists must also decide how big – or small – their deductibles should be. Car insurance deductible is the amount the covered driver has to pay in the event of a loss. The driver must pay the premiums and the insurance company pays for excess losses. For example, if a driver chooses a $500 deductible and $4,000 in damages, the driver pays the first $500 and the insurer pays the remaining $3,500.

Since motorists have a choice regarding the size of their deductible, it can sometimes be difficult to make the right decision and set it at the right level. To deal with this issue, financial expert Dave Ramsey has some good advice.

This is how the deductible should be, according to Ramsey

Ramsey talked about the pros and cons of deep discounts and downgrades on the Ramsey Solutions blog.

“If you choose a low-cost policy, your insurance company will see you as a low risk and will award you a low-cost policy,” the blog says. “If you choose a low-cost policy, your insurance company will see you as a high risk and – you guessed it – pay you a high premium.”

Ramsey said most people would be wise to invest $1,000 — as long as they have an emergency fund with that much. Saving a $1,000 emergency fund is one of the cornerstones of Ramsey’s financial advice and is one of the “baby steps” he encourages people to take to manage their finances. For those who meet this requirement and save $1,000, a deductible of this size will provide more affordable insurance premiums and ensure that the loss of a car accident can be affordable.

“A $1,000 deductible usually means you’ll pay less. And since the first Baby Step is to save a $1,000 emergency fund, you’ll have more money in your savings account,” said Ramsey.

Should you listen to Dave Ramsey?

Ramsey’s recommendation to choose a large down payment (which can be stored with emergency funds) makes sense to many people. A low deductible can raise premiums significantly, and it may not be worth paying a higher premium in the event of an accident when the loss can be easily covered.

To make sure the deductible is worth it, Ramsey also suggests doing some research — and every driver should do it. Essentially, this involves evaluating how much money can be saved by switching to the cheapest policy and seeing how long it takes for these costs to cover the difference in deductibles.

Ramsey gives the example of a person who increases his income from $500 to $1,000 – so he has to pay $500 if he loses. If this move reduces annual premiums by $150, in about 3.5 years, the savings could cover an additional $500 in out-of-pocket costs after an accident or other loss. If no accident has occurred in 3.5 years, these additional costs can sit and wait to cover a future accident while the driver continues to benefit from the savings.

Analyzing this is a good way to determine if Ramsey’s recommended $1,000 deductible makes sense.

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