You may already know some components found in an auto insurance policy , in particular:
The premium , which is the price of the policy.
The maximum limit , which is the maximum value that the auto insurance company is obliged to cover in each incident.
Let’s focus on a third component, the franchise.
The excess (also known as the deductible) of an auto insurance policy represents the amount you have to pay before the auto insurance company covers the expenses.
A deductible applies only in cases of material damage, that is, crash insurance policies and comprehensive coverage insurance . Liability insurance policies do not have franchises.
Examples of how the franchise works when you are guilty of a crash
Example 1: Damages do not exceed the value of the franchise
Francisco is involved in a crash, for which he is responsible. Property damage to the car costs him $ 850. You have a collision insurance policy with a deductible of $ 1,000 and a maximum limit of $ 15,000.
How does Francisco’s coverage work?
In this case, it is Francisco’s turn to pay the $ 850 because the material damages have not exceeded the value of the franchise.
Example 2: Damages exceed the value of the franchise
Miguel is involved in a crash for which he is responsible. Property damage to the car costs you $ 10,000.
Fortunately, Miguel has a collision insurance policy with a deductible of $ 1,000 and a maximum limit of $ 15,000.
How does Miguel’s coverage work?
- Miguel has to pay the first $ 1,000 of the repairs to the car, that is, the value of the franchise.
- After paying the first $ 1,000, there is $ 9,000 left in repairs.
- Auto collision insurance covers the rest of the costs ($ 9,000).
- In total, Miguel has to pay $ 1,000 and the auto collision insurance covers $ 9,000.
Example 3: Damage exceeds the maximum limit
Pilar is involved in a crash, for which she is responsible. Property damage to the car costs him $ 8,500.
Fortunately, Pilar has a collision insurance policy with a deductible of $ 500 and a maximum limit of $ 5,000.
How does Pilar’s coverage work?
- Pilar has to pay the first $ 500 of repairs to the car, that is, the value of the franchise.
- After paying the first $ 500, there are $ 8,000 in repair costs left.
- Auto collision insurance covers $ 5,000 for repair costs, up to the maximum limit. $ 3,000 left in repair costs.
- Pilar would have to pay the last $ 3,000 for repair costs.
- In total, Pilar has to cover $ 3,500 and collision auto insurance covers $ 5,000.
How is the excess applied if you are not at fault in an accident?
Example 4: There is another at-fault driver.
Rogelio is involved in a crash, for which he is not responsible.
In this case, it is up to the other driver’s auto insurance company to cover the costs associated with the crash. Rogelio’s auto insurance policy is not necessary.
Example 5: No person is guilty (natural disasters)
During a storm a branch fell, destroying the windshield of Sofia’s car. The new windshield costs $ 450.
Fortunately, Sofia has comprehensive auto insurance, which protects her car when there is damage not associated with a crash. The franchise is $ 400 and the maximum limit is $ 1,500.
How does Sofia’s coverage work?
Sofía has to pay the first $ 400 of the cost of the windshield, that is, the value of the franchise.
After paying the first $ 400, $ 50 of the cost of the windshield remains.
Comprehensive auto insurance covers the rest of the cost ($ 50).
In total, Sofia has to pay $ 400 and comprehensive auto insurance covers $ 50.
The excess affects the price of auto insurance
A car insurance policy with a high excess means that the insurance company is less likely to have to cover the costs of an incident. Therefore, a car insurance policy with a high excess is cheaper for you.
If your priority is to save as much as possible, it is better to choose a higher auto insurance policy. The downside is that you could pay a large unexpected amount if you are involved in a crash or accident.
If you prefer more anticipation of your long-term expenses, it is better to keep a lower auto insurance policy. The big disadvantage is that you will need to pay even more when you are not involved in any accident or collision.
Why do franchises exist?
Franchises help control the expenses of the auto insurance company
Imagine the auto insurance company had to process every little $ 25 or $ 50 claim. It would have to hire more employees to handle this increase in claims. When you agree not to file small claims with the auto insurance company, the auto insurance company agrees to lower your insurance premium.
Franchises prevent fraudulent and irresponsible acts
Without deductions, some people could damage their own belongings or behave irresponsibly when they know that the insurance company will cover all associated costs. It would mean more expenses for the auto insurance company and, as a consequence, higher premiums for everyone.
With a franchise, such people share in the monetary consequences of their irresponsible behavior, preventing the same.
The franchise fits your priorities
If you prefer a car insurance policy that covers only the most catastrophic cases, you can ask for a higher excess and pay a cheaper premium. If you prefer more security, it is possible to request a lower franchise. By selecting the franchise value for your auto insurance policy, you have more control over the policy objectives.
Is there a minimum or maximum franchise according to the law?
Since civil liability auto insurance policies do not have franchises. Therefore, in general, there is no minimum or maximum franchise according to the law. But keep in mind that you may face contractual obligations that dictate franchise requirements for collision insurance. For example, if you have a leased car, your lease may require you to maintain a collision insurance policy. In many cases, the contract also dictates the maximum excess for such a policy.
In addition, you may have additional coverage requirements if you rent a car .
Who decides the value of the franchise?
You decide! When you ask for a quote, in many cases you can select within a range of values for the auto insurance policy. The price will be affected according to the value of the franchise, but you choose the final value of the policy.
How do I know if I have chosen an appropriate franchise?
Nobody likes to pay more than necessary for a car insurance policy and only in some cases it is advisable to maintain a policy with a low excess. At the same time, a policy with a high excess exposes you to the risk of having to pay many unforeseen expenses if you are involved in an accident.
Ask yourself: If you were involved in an accident today, could you pay the full value of the franchise? If the answer is “no,” you should consider lowering the excess on your policy until you are comfortable with the possibility of covering this expense at any time.
Also, you should consider the value of the car. For example, one with an actual value of $ 1,000 is not worth it for a policy with a $ 1,500 excess, as you will have to pay more than the value of the car before receiving the benefits of the policy.
The importance of considering the franchise when comparing quotes
If you are comparing several auto insurance quotes, don’t forget to compare the excesses between the quoted policies. If you find a quote that is much cheaper than the others, ask yourself if a higher franchise. Also, if two quotes have similar prices, which one has a lower franchise? A policy that seems cheap at first can be much more expensive if you are not prepared to cover the cost of a high excess.
At first glance, the franchise appears to be a confusing complication of the auto insurance world. Actually, the franchise helps you tailor your auto insurance policy according to your needs and priorities. In addition, franchises help auto insurance companies reduce their costs, and consequently, help you save money.