What are Out of Pocket Damages?

First Time Driver
••• Getty Images/Caiaimage/Paul Bradbury

Most of us purchase car insurance because it’s the law, but also for the peace of mind that comes with knowing you’re covered in the event of an accident.

Unfortunately, your monthly premium payment is not your only expense when it comes to car insurance. Out of pocket expenses are an often frustrating part of car insurance claims. 

Damage to your vehicle can result in different kinds of out of pocket expenses, which is the money you will be on the hook for, even if you have car insurance, when you are in an accident or incur other physical or monetary damage. 

Out of pocket payment can also be used even when your insurance company would cover the damage if you don’t want your insurance rates to skyrocket from a simple small accident. Of course, if you don’t have car insurance, any damage to your vehicle will result in an out-of-pocket payment, but you really want to avoid that scenario — unless you live in a state where car insurance isn’t mandated by law, you’ll be facing steep legal penalties in addition to the financial repercussions if you get into an accident or cause other damage with your vehicle while uninsured.

In a fender-bender or other small incident, knowing when to pay out of pocket and when to file a claim can actually save you money in the long run.

What is an Out of Pocket Expense?

It actually refers to your pocket — you know, where your wallet is kept? That is, this is the money coming from your pocket, wallet, or bank account and paying for repairs to a damaged vehicle or property. This is money you pay in addition to your car insurance premium.

When is Money Paid Out of Pocket?

Deductible: With most insurance policies, you’ll have a set deductible that you will be responsible for paying before your insurance coverage kicks in and your insurer foots the rest of the bill.

Expect to pay out of pocket for your deductible. The deductible is your responsibility for lots of different claims, usually physical damage claims such as comprehensive or collision. You select the deductible at the time you add the vehicle to your policy. Deductible amounts can vary greatly per person and per coverage. The higher your deductible, or out of pocket expense, the cheaper your car insurance premium is. Your insurance deductible will need to be paid when you pick your vehicle up from being repaired.

Example: John hits a deer and sustains $3000 worth of damage to his car. His comprehensive deductible, or out of pocket expense, is $100. He pays the $100 in order to get his vehicle repaired.

Damage is less than deductible: Sometimes damage occurs to your vehicle and it costs less to repair it than what your deductible is. That means you will be covering the cost to repair the vehicle. Your car insurance only covers damages that exceed your deductible amount.

Example: John hits a patch of ice and slams into a guardrail causing $4000 worth of damage to his car. His collision deductible, or out of pocket expense, is $500. It is his responsibility to pay the $500 in order to get his vehicle repaired.

Avoid surcharges from filing an at-fault accident: Sometimes it is in your best interest to pay the damages which occur from a minor accident. If the cost to repair the damage is a manageable amount above your deductible, you could save money in the long run by avoiding future surcharges to your policy from filing an at-fault claim. It can be a tough call when it comes to this out of pocket expense but the situation does arise from time to time.

Example: John busts his side-view mirror entering his garage. It is $600 to replace the mirror. Instead of paying a surcharge for an at-fault accident on his car insurance policy over the next three years, he opts to replace the mirror by paying the full $600 out of pocket.

You owe more than a vehicle is worth after a total loss accident: Probably the worst out of pocket expense is when you owe more than your vehicle is worth and you have a total loss accident. If you do not have gap coverage, the difference between what your vehicle is actually worth and what you owe will be an out of pocket expense. Always carry gap insurance to protect yourself when you owe more than a vehicle is worth. In some cases, it could be thousands of dollars.

Example: John has bad credit and financing a new vehicle. He took out an extended 72-month loan with a high-interest rate. One year after his purchase he was in a bad accident which totaled out his vehicle. John still owed $15,000 on his vehicle but the vehicle’s actual cash value was only $12,500. His insurance company covered $12,000 after his deductible. John's out of pocket expense totals $3,000 to finish paying off a vehicle he can no longer drive.

When you hear people speak of an emergency fund, out of pocket insurance expenses fall into that category. Always keep at least enough money to cover your insurance deductible on hand if at all possible. It will make life a lot less stressful in case of a car accident.