There is some good information on the Internet reviewing Nationwide‘s Vanishing deductible option, and how it could cost some customers more money than they save by having their deductible vanish. But there is one serious misconception some of these articles make regarding why the vanishing deductible is a good idea for some customers, and an important point or two left out of other reviews of the vanishing deductible.
I’ll clear up the misconception, and explain what has been missed by other reviews, and tell you why I don’t think Nationwide’s Vanishing Deductible option is a good idea for anyone. I’ll also suggest an option on how to get a deductible credit that really saves you money, you can do with any insurance company.
First, I would like to warn auto insurance shoppers, in general, of additional features offered by auto insurance companies, seeming to offer a better value to the customer, to get the customer to pay more for what the insurance company claims to be a superior product.
For example, Company “X” may say you should insure with them, because they offer an auto insurance policy giving you a hundred dollar credit towards your deductible, each year you are insured with them, at no additional cost ( I’m making up this example: I don’t know of any insurance company providing a deductible credit without other requirements, like keeping a clean driving record, and they charge you more to get this benefit). What is the real value of this feature? You pay less out of pocket if you have an accident. In other words, you save money.
Now, if Company “Z” can give you the same auto insurance coverage, without the added value of the $100 deductible credit each year, but Company “Z”‘s auto insurance costs $125 less a year, which insurance company REALLY provides the best value, and saves you money?
With Company “X,” you save $500 if you have an accident and damage your car after 5 years. If there is no accident, you don’t save ANY money. With Company “Z,” you save $625 after 5 years, even if you don’t have an accident, by paying lower rates.
If you are going to pay more for a benefit saving you money, you need to make sure the savings from the benefit is worth the cost. The biggest cost savings benefit you can give yourself is shopping your auto & home insurance each year, to make sure you are paying the lowest rate, for the coverage you need, with an insurance company with good service.
Let’s look at Nationwide’s Vanishing Deductible option:
1. You pay $60 a year to have it. (Check with Nationwide to confirm this price is still correct, or it’s the right price in your state, before you buy it).
2. You get an immediate $100 credit towards your Collision deductible (if you are eligible for the option), which will increase each year you don’t get a ticket or accident, up to a maximum credit of $500.
How does this work?
Say you have a $500 Collision deductible for your car, you buy the Vanishing Deductible option, and 4 years later, you slide into a tree on a wet road, and it will cost $900 to repair your car.
Rather than having to pay your $500 deductible, and Nationwide paying you $400, you pay only $100, Nationwide pays $800, and you save $400 with the vanishing deductible option.
Having to pay less when you have a claim is something customers really appreciate.
But over the 4 years, you have paid $60 a year to have the Vanishing deductible option, so you have paid $240 to save $400. You still save $160, so it was a good deal, right?
Not so fast. Insurance companies surcharge for at fault accidents (and one car accidents due to weather ARE considered at fault, like most one car accidents) when they pay above a certain dollar amount, such as $500, $750, or $1,000 ($500 used to be the industry standard, but some insurance companies have increased the dollar threshold, or it is required in some states).
When you have a lower deductible, or a vanishing deductible, this increases the chance a minor accident will be surcharged. An accident surcharge can be 30% to 40% more to the base rates of your auto insurance, but the actual impact to your price may be more, by also losing good driver discounts.
Going back to the example, if Nationwide pays $800 for your accident because you have the Vanishing deductible option, and Nationwide’s threshold is $750 for your state to surcharge for an at fault accident, you will be surcharged at your renewal, with what could be a substantially larger premium.
If you did not have the Vanishing Deductible option, Nationwide would pay $400 for the claim, under the $750 surcharge threshold, and you would not be surcharged.
Let’s see what happens to the $140 savings you received with the Vanishing Deductible option, when we consider the accident surcharge:
Your 6 month auto premium before the accident is $500. Let’s say the accident surcharge increases your premium only 20%, to $600. The surcharge will last for 3 years. Rather than saving $140 with the vanishing deductible, you pay $600 more over 3 years. Your net cost is $460 more than if you did not have the Vanishing Deductible option.
There are some sweet spots where the Vanishing deductible can save you money. If you have a small accident where Nationwide pays out less than the accident threshold. Or, a larger claim where you will be surcharged whether you have the vanishing deductible or not.
Also, you may qualify for accident forgiveness, if you are long term customer with no previous at fault accidents, where you will not be surcharged for your first at fault accident.
For example, you may have accident forgiveness after being a customer over 5 years, with no previous at fault accidents in the last 5 years, so you won’t be surcharged.
But the problem for long term customers with the Vanishing Deductible option, is the credit maxes out at $500. At the cost of $60 a year, you will have paid $540 at 9 years for a $500 credit. If you get the credit, you go back to a “zero” credit, continue to pay the extra $60, to get $100 credit for the next year, but only if you have had no tickets or other accidents in the mean time.
Hoping to have accidents costing a certain dollar amount, or properly timed accidents, for the Vanishing Deductible option to make financial sense, are not in your control.
A misconception I want to clear up is the Vanishing deductible makes sense if it allows you to afford a higher deductible, like a thousand dollar deductible, because of the additional savings provided by the large deductible. Other articles & bloggers overestimate the amount of the savings
The savings can be 10% to 15% for choosing a $1,000 Collision deductible, but it is not a savings on your ENTIRE insurance premium, it is a savings on only the Collision portion of your premium.
For example, you pay $500 for your 6-month auto insurance premium. The cost of your 6-month Collision premium with a $500 deductible is $200 of the total $500 premium. If you choose a $1,000 Collision deductible, you save 15% of the $200 6-month Collision premium, which is $30.
The cost of the Vanishing Deductible option is $30 every 6 months. The savings for the higher deductible is not more than what you pay to have your deductible vanish, so you pay the same amount with a $500 deductible, or a $1,000 deductible with the Vanishing Deductible option.
If you have an accident a year from now, would you rather have a $500 deductible, or a $1,000 deductible with a $100 credit?
Even if your Collision premium was $300 of your total $500 6-month premium, would it be worth it to save $30 a year, and pay $200 more out of your own pocket, if you have an accident 3 years from now?
Here is a better idea: choose the highest deductible you can afford. High deductibles are a great way to decrease your premium and keep you from having your insurance pay small claims, which will increase your rates, or keep you from getting lower rates when you shop your insurance each year.
Take the $60 you would have paid for the Vanishing Deductible, and put it in a special bank account to use if you need to pay your deductible. Each year you are giving YOURSELF a vanishing deductible credit of $60 a year, which you get regardless of whether you have a ticket or an accident.
As years go by, and you don’t have an accident, the money builds, and you can afford to take an even higher deductible, saving more money. If you have the extra money to save, you can put more money in the account, and save more money by dropping Collision, when you have saved enough to get a replacement car.
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