What are the damages that an individual bears out of their own pocket?

Definition

The out-of-pocket expenses an individual incurs are the costs that you will have to bear, even if you have car insurance, when you are in an accident or suffer other bodily or financial damage.

What are the out-of-pocket expenses an individual bears?

The out-of-pocket expenses an individual bears are the costs of repairing the damaged car or property. You may also pay out of pocket if you do not want to raise your insurance rates, even if the insurance company will cover the damages.

If you do not have car insurance, any damage to your vehicle will result in out-of-pocket costs, but you really want to avoid that scenario, even if you live in a state where insurance is not legally required. In places where insurance is mandated, you will face severe legal penalties in addition to financial consequences no matter where you live if you have an accident or cause other damage with your car and you are uninsured.

In the case of a minor accident or another small incident, knowing when to pay out of pocket and when to file a claim can save you money in the long run.

How out-of-pocket expenses work

With most insurance policies, you will have a specific deductible that you must pay before your insurance coverage kicks in and the insurance company covers the rest of the bill.

Expect to pay out of pocket for the deductible. The deductible is your responsibility for many different claims, usually for bodily injury claims such as comprehensive or collision. The deductible is set when you add the vehicle to your policy. You will need to pay your deductible when picking up the vehicle after repairs.

Deductible amounts can vary significantly from person to person and depending on coverage. The higher your deductible or out-of-pocket expenses, the higher your car insurance rates will be.

Sometimes your vehicle sustains damage, and the repair cost is less than your deductible. This means you will bear the cost to repair the vehicle. Your car insurance only covers damages that exceed your deductible amount.

Types of out-of-pocket expenses

Minor Accidents

Sometimes it may be preferable for you to pay for the damages resulting from a minor accident. If the cost to repair the damage is a manageable amount higher than your deductible, you can save money in the long run by avoiding future charges on your policy by filing a liability claim. Making the right decision regarding these out-of-pocket expenses can be challenging, but this situation occurs from time to time.

Accidents Resulting in Total Loss

The worst out-of-pocket expense you might incur is when you owe more than the value of your vehicle and get into an accident that results in a total loss. If you do not have gap coverage, the difference between the actual cash value of your vehicle and what you owe will be an out-of-pocket expense. It is recommended to carry gap insurance to protect yourself when you owe more than the value of the vehicle. In some cases, this amount can be thousands of dollars.

For example, John has poor credit and finances a new vehicle. He took out a 72-month loan at a high-interest rate. After one year of ownership, he got into a bad accident that resulted in a total loss of his vehicle. John still owes $15,000 on his vehicle, but the actual cash value of the vehicle was only $12,500. The insurance company covered $12,000 after the deductible. John’s total out-of-pocket expenses are $3,000 to pay off a vehicle he can no longer drive.

When

You hear people talking about the emergency fund, and the insurance expenses that an individual bears out of pocket fall into this category. Always maintain at least a sufficient amount of money to cover your minimum insurance if at all possible. It will make life less stressful in the event of a car accident.

Conclusion

Ultimately, the expenses that an individual bears out of pocket are the costs that you have to pay for yourself, even if you have car insurance. It might be better to pay these costs even if your insurance will cover them to avoid increasing insurance premiums. The higher the minimum you bear out of pocket, the lower your insurance premiums will be. It is crucial to plan ahead so you are not surprised by the out-of-pocket damage costs.

Source: https://www.thebalancemoney.com/what-is-out-of-pocket-527310