Vanishing deductible car insurance is a new concept that is becoming popular with many insurance carriers, although Nationwide was the first company to use the term. Vanishing deductible programs lower your deductible every year you do not have an accident until your deductible reaches zero.

For example, suppose that your collision deductible is $500. If you do not file an at-fault claim the first year of your coverage, your collision deductible the next year will be only $400. For every year after that in which you do not have a claim, your deductible will decrease until it reaches zero. After that, your deductible stays zero until you must file a claim, at which time it goes back up to $500.

Most vanishing deductible plans have limitations

For example, Nationwide limits deductible reduction to $500, so the most you can save is five years’ worth of “vanishing deductible.” The Hartford, which has a “disappearing deductible” plan, takes $50 off your deductible after three years of good driving and only takes off $50 each year after that; however, there is no limit to the amount your deductible can be reduced.

One of the biggest drawbacks to vanishing deductible plans is that they cost money. Many people think that they automatically qualify for vanishing deductible if they are accident free, but for most companies this is not the case. You must opt for the vanishing deductible plan as part of a coverage package. For the average consumer, this can be more expensive than simply paying the deductible in the long run.

For example, Nationwide offers “vanishing deductible” as part of a coverage package that costs consumers an extra $60 per year. Since you are only losing $100 per year off your deductible that is actually a net gain of $40 per year. However, once your deductible “vanishes” to the zero point, you will continue to pay the $60 per year. This means that if your deductible is $500, you will really only save $200 by getting the vanishing deductible plan in the five years it takes your deductible to get to zero, and that $200 will be consumed in about three additional years. After that, you are paying for no real benefit to yourself if you continue the vanishing deductible plan.

If you add another car, you will pay an additional $10 per year. Since you can only use one “vanishing deductible” at a time, you are actually paying for something you cannot use if you add additional vehicles. In simpler terms, if you have an at-fault accident, your deductible is only forgiven once then goes back to the original amount. Therefore, if you are paying for two vehicles, only one of you can actually use the “vanishing deductible” benefit before it goes back to $500.

The Hartford’s plan is a bit different. With this company’s plan you only save $50 per year on your deductible but the amount you can accumulate in deductible savings is much greater. You must also pay for the Hartford’s vanishing deductible plan, but the type of program that allows you to add this benefit is not as simple as Nationwide’s flat-fee program. The Hartford instead offers vanishing deductible as part of one of its upper-tier packages of coverage.

While these are only two examples of the “vanishing deductible” principles, most companies will have similar policies. Therefore, is it a good idea to take out “vanishing deductible” coverage?

In most cases, you are better off setting your deductibles at a high level and simply saving the money to pay for the deductibles yourself. If you are a reasonably careful driver and do not have claims, you will not need the deductible money, but if you do, it is nice to have it in a savings account where you can easily access it. A good plan is to set your deductible at a moderate amount such as $500, then save money until you have that amount in a savings account. Once you do, you can raise your deductible and continue to save until you have the amount necessary for your new deductible.

Raising your deductible will often cut your insurance premiums significantly, because insurance companies realize that someone with a $1,000 deductible is not going to file a frivolous claim for a few hundred dollars. This means that someone with a high deductible will probably pay for most “fender benders” out of pocket and save the claims for serious accidents, which are far less frequent than minor ones.