If you watch television, or listen to the radio, you've probably seen/heard the aggressive ad campaign by Liberty Mutual Insurance company. In a series of mildly entertaining spots, Liberty Mutual attempts to slam other insurance companies by talking about how their insurance product protects you better than their competitors. My kids hate these ads because they thing they are annoying. I hate these ads because they prey on customer's lack of knowledge about insurance, and imply that Liberty Mutual's insurance offers things that other insurances don't.
Take, for example, the Deductible Fund™ commercial. This spot suggests that it is unreasonable for an automobile insurance policy to require the policyholder to take some of the financial burden from a claim. According to the commercial, if you have Liberty Mutual's Deductible Fund™, you could pay no deductible if you need to make a claim. It goes on to say that your deductible will go down $100 per year until you have no deductible.
What the commercial fails to explain is how much it costs to have this benefit. Based upon the most recent figures I can find, the Deductible Fund™ coverage costs $60 per year for the first car, and $10 per year for each subsequent car. For the average two car family, you'd be paying $70 per year for $100 of lower deductible. On the surface this seems like a good deal. However, unless you make an extraordinary number of insurance claims, it's probably not a great tool for you.
The average motorist makes an insurance claim only once every 17.9 years, according to Fox Business. The average consumer could do a lot of useful things with $70 every year for 17.9 years, including paying off debt faster, contributing to a retirement account, or just building up their deductible emergency fund.
If you contributed that $70 to a deductible emergency fund every year, you could gradually increase your deductible, which would decrease the amount of your insurance premium. After the average 17.9 years, you'd have over $1200 in saved Deductible Fund™ fees, plus any accrued interest, plus the money you'd saved with lower premiums. Statistically speaking, that's a lot more favorable than a lower deductible.
Now, let's say that you do have to make a claim more frequently than the national average. Let's say you make a claim every four years. After four years, the average two car family would have paid $280 in Deductible Fund™ fees and would have the first $4oo of any deductible waived when they made a claim. If you have a typical $500 deductible, you would only be responsible for the first $100 of the claim. In this case, the Deductible Fund™ may have been a good choice. Of course, your deductible returns to the full amount in the year after the claim, and your rates may also go up.
Another factor that can not be easily evaluated is whether Liberty Mutual is increasing the base price of their policies to offset the costs of the add-on policies such as the Deductible Fund™. I don't know if there is an objective, scientific way to figure that out.
Basically, the Deductible Fund™ is similar to a savings account, except that the money is being controlled by your insurance company instead of you. For most people, a better strategy is to build your own deductible emergency fund, keep your money in your pocket, and (probably) save a bundle.
Note: Many major insurance companies offer similar programs. Liberty Mutual just makes the biggest deal about it!