The Vanishing Deductible Catch

You may have seen commercials on TV advertising a “vanishing deductible” (also commonly called a disappearing deductible) and thought it was a great idea. The concept is pretty straight forward and seems easy to understand: If you are accident and moving violation free for a year, your car insurance deductible is reduced by a certain amount. If you drive enough years without an accident or moving violation, then it vanishes and you won’t have a deductible to pay if you happen to get into an accident in the future.

The key is to realise that the vanishing deductible isn’t quite as straight forward as it’s made out to be on those TV commercials. In fact, you might be surprised to learn that when you dig a little deeper into the fine print, it becomes apparent that having a vanishing deductible on your car insurance policy can actually cost you more money in the long run than not having it at all. Here is an example from Nationwide’s vanishing deductible fine print:

If you decide to opt for the vanishing deductible with Nationwide insurance for your car, it costs an extra $60 a year compared to not having it part of your policy and has a $500 vanishing deductible limit. Since you are forced to pay an extra $60 for this coverage, the reality is that you’re only saving $40 a year (not the $100 that you assumed from the TV commercial) with a vanishing deductible as part of your insurance policy. While you may assume that $40 a year in savings is still better than nothing, this is not necessarily how it may all work out. Here is a scenario where a vanishing deductible can actually cost you money:

When you sign up for car insurance, you choose to add the vanishing deductible with a $500 deductible. Being the good driver that you are, you don’t have an accident or moving violation for 10 years after purchasing your car insurance. Then in year eleven you have an accident that ends up costing $2000 in repairs. In this example, Nationwide will pay your $500 deductible since you were accident free for more than five years, so on the surface it would appear that you have saved $500 by having chosen vanishing deductible. The truth is that for 10 years you’ve been paying $60 each year to have the vanishing deductible as part of your policy, or $600. When you factor in this reality, you ended up paying an extra $100 for insurance because you were such a good driver in this case.

Another catch is that a moving violation also cancels the vanishing deductible for the year. That means that if you get a ticket one year, you have paid $60 for the vanishing deductible but you don’t get the benefit of anything vanishing from your deductible.

While the above two catches may convince you that vanishing deductibles aren’t worth it, there is a way to make the vanishing deductible work in your favor. The key is what you choose as your car insurance deductible. Nationwide limits its vanishing deductible to $500, but instead of choosing a $500 deductible, you should raise your deductible from $500 to $1000. Using the exact same scenario as above with a $2000 accident in the eleventh year, Nationwide would cover $500 of your $1000 deductible plus the $1000 above the deductible and you would have to pay $500. In addition, you would have paid $600 in fees over the 10 years for having the vanishing deductible as part of your car insurance policy. Just as above, you end up paying $600 for a $500 discount, but because you chose the $1000 deductible instead of the $500 deductible, there is an additional factor to consider.

By raising your car insurance deductible from $500 to $1000, a driver would typically save somewhere around 15% off their insurance premiums. If you were paying $1500 a year for car insurance, raising the deductible from $500 to $1000 would end up saving $2250 over the 10 years. Subtract this savings from the $1100 you paid ($600 for the vanishing deductible for 10 years plus the extra $500 of the $1000 deductible that wasn’t covered by the vanishing deductible) and the vanishing deductible option results in you saving $1150. The risk in this case is that an accident occurs in the first few years putting you on the hook to pay most of the $1000 deductible.

What it comes down to is that it’s important to run the numbers to see if a vanishing deductible is worthwhile considering the type of driver you are. If you make the mistake to simply assume that a vanishing deductible would be good for you without crunching the numbers and coming up with a plan that works to your advantage, there’s a good possibility that the vanishing deductible will help your insurance company more than you.