Filing an Insurance Claim vs. Paying out of Pocket

When the damage is less substantial, or if you only just enrolled in your home or car insurance policy, you might be feeling more conflicted. In reality, there are plenty of concerns you might have about deciding whether to file a claim or pay out of pocket. Let’s take a look at when each course of action may be appropriate.

An insurance claim is a statement of loss from your provider that you fill out asking for your insurance company’s financial help. If it’s approved, the insurance company will compensate or reimburse you. 

While it sounds simple, it’s not so cut-and-dry. Your insurance only covers damage from covered perils. And, filing too many claims is a red flag in the eyes of insurance companies. So, there are some scenarios when you might be asking yourself if you should pay out of pocket for a car accident or for damage to your property.

If your home has been rendered uninhabitable by a disaster, or your car is completely destroyed, there isn’t much of a question. You should file a claim. But, here are some instances when paying out of pocket might be a good idea

If you’ve incurred damage to your car or home that is less than your deductible, you shouldn’t file a claim. If the amount of damage is slightly over your deductible, you still might want to consider not filing a claim with your insurance. Not only can the claims process take longer to complete the necessary repairs, but you may face unnecessary repercussions from your insurance company.

A deductible is the amount you have to pay for damage when filing a claim before the insurance company chips in to handle the rest. Car insurance deductibles are usually fixed amounts, typically $500 or $1,000. Home insurance deductibles could be fixed dollar amounts too, such as $2,500 or $5,000, or they could be a percentage of your home’s dwelling coverage if you’re dealing with wind-related damage.

Even if the source of damage is covered under your policy, your insurance company won’t pay for damage that’s less than your deductible. When you got your plan, you agreed to pay a certain amount before the insurer would step in to cover the rest. If you’ve incurred catastrophic damage that necessitates a complete rebuild, having to only pay your deductible is a small price to pay. In most cases, the insurance company bears the majority of the expense.

Damage that amounts to less than your deductible is typically minor. Whether it’s to your home or your car, it likely won’t greatly influence your way of life. Your insurer expects you to be able to have some money set aside, or put some together relatively easily for fixes if this is the case.

Insurance companies typically allow policyholders to lower their monthly premiums if they opt to pay a higher deductible. If you don’t have some extra cash on hand to pay for small damages you may incur, you probably shouldn’t go this route.

Filing claims can increase your insurance rate. So, it could be more cost-effective in some instances to pay out of pocket for damage to your car or home if it’s just over your deductible amount because your provider may raise your rate come renewal time more than the amount they paid to cover your damage.

For instance, let’s say your wood stove in the living room causes an unexpected fire. Your family manages to extinguish it before it gets out of hand, but not before it ruins half of your wood floors and singes your living room furniture and drapes.

In total, the fire caused $3,000 worth of damage to your floor and personal property. You have a $2,500 home insurance deductible. Even though your insurer should cover the damage and the amount is above your deductible, you may not want to file a claim. The damage wasn’t substantial, and after you pay your deductible your provider would only give you $500.

Instead, paying out of pocket could be more cost-effective in the long run because your insurer may raise your rate for filing a claim. You may end up paying more than $3,000 over a stretch of years in the form of increased premiums as a result of the fire incident.

For example, the average cost of homeowners insurance in South Florida is $4,804 per year for a $150,000 house. If you paid this in premiums, and your insurer raised your rate just 5% after the fire claim, you’d pay an extra $240 a year. After three years, you will have paid more than the $500 the insurer gave you, and you will have paid more than $3,000 in raised premium costs after 12 years.

Instead of paying higher rates that will eventually add up to a cost higher than what you would have needed to pay for covering the relatively minor damage yourself, you may want to pay out of pocket.

If the damage is substantial, you may not have a choice. But if only your vehicle sustained damage or damage to the other vehicle is minimal, you might want to avoid filing an insurance claim at all if you just filed one recently.

What an insurance company considers ‘too many’ claims in a ‘short period’ varies by provider. But, usually, two claims in one year or three claims in two years will cause your rates to increase. Even one at-fault accident can increase your car insurance rates. Like we touched on earlier, you could quickly end up paying more down the line than your auto carrier gave you to repair the initial damage.

Filing excessive car insurance claims in a short time can cause your provider to not renew your policy in some cases. If this happens, you may only be eligible for high-risk car insurance, which comes with much higher rates.

If you’re at fault in an accident, but the other driver wasn’t hurt and there’s minimal property or vehicle damage, you may want to just discuss paying for the damage you caused personally if you can afford it. If only your car was damaged but it’s still operable and safe to drive, you may just want to cover the repair expenses of your vehicle when you’re able to. Just be sure that the damage won’t compromise the car in a way that could influence potential insurance reimbursement for future accidents.