Dave Ramsey says you can save money by increasing your car insurance deductible. We calculated whether it worked

Ramsey Show/Youtube Highlights

As the price of everyday essentials like gas and groceries rises, Americans will be taking a little break almost anywhere they can get it.

Recently, on his radio show (1), Dave Ramsey offered an unexpected way to save on car insurance that involves taking on more risks. When asked by a listener whether he should lower or increase his car insurance deductible, he suggested raising it to capture the savings he would get from the monthly premium.

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He pointed out that this strategy only makes sense if the reduction in your premium rate is significant enough to make a higher deductible worth it. You could take the money and put it in a high-interest savings account. If you ever need it, you can withdraw the money.

“We’re always trying to increase deductibles and increase the amount of savings we have to cover so we give less money to the insurance company,” he said.

The mathematics behind Ramsey’s thinking

Let’s play out this scenario with some basic numbers.

Say you pay $300 per month for your car insurance and have a $500 deductible. If you change your policy and take on a $1,000 deductible but your premium drops to $250, Ramsey’s approach could be worth it.

Lowering your premium rate by $50 per month is equivalent to saving $600 per year, compared to the $500 additional risk you take on. This is just one example of how this could work. But in general, if the added risk makes it worth it within three years, Ramsey said.

“Take the savings on your premium, divide that by the additional risk, and if that’s a three-year, say, risk pattern, it’s probably wise to go with the higher deductible in that case,” he said.

A scenario where this doesn’t work, using the same example above, would be if your premium only drops $10 to $290 with a $1,000 deductible. That’s a savings of $120 per month. So it would take more than three years for the money to reach your account.

Read more: Are you paying too much for car insurance? Here are 3 smart ways to reduce your monthly bill

“Insurance should cover catastrophes, not hangnails”

Ramsey compared adding a higher deductible to your car insurance to being able to do the same with your health insurance. You’ll cover over $10,000 in upfront costs for a premium that’s significantly lower than a plan with a lower deductible.

According to Ramsey, this works because this level of debt doesn’t cause you to go bankrupt over a medical bill. High-deductible health insurance plans are also typically eligible for health savings accounts.

“What causes you to go bankrupt is $350,000 on a NICU stay with a baby or $350,000 on a heart bypass,” he said.

“When choosing an insurance plan, you want to make sure you have the big things covered,” Ramsey added. Deductibles apply to “small things”.

“Insurance should cover catastrophes, not hangnails,” he said. “That’s what you’re looking for.”

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