Question

Using a breakeven analysis, determine how long it would take for the following options in auto insurance deductibles / premiums to break even.

Option 1: $500 deductible comes with a $775 annual premium.

Option 2: $1,000 deductible comes with a $650 annual premium.

How many years without a claim would it take for the two options to break even?

Answer 1

Answer: It would take 4 years without a claim for Option 2 to break even with Option 1. After 4 years, the savings from the lower premium on Option 2 would offset the higher deductible, resulting in lower total cost.

Step-by-step explanation: To calculate the break-even point, we need to determine the point at which the savings from the lower premium on Option 2 offset the higher deductible.

Option 1:

Annual Premium = $775

Deductible = $500

Option 2:

Annual Premium = $650

Deductible = $1000

Let x be the number of years without a claim.

For Option 1, the total cost over x years would be:

Total Cost = $775x + $500

For Option 2, the total cost over x years would be:

Total Cost = $650x + $1000

To find when the two options break even, we need to set these two equations equal to each other and solve for x:

775x + 500 = 650x + 1000

125x = 500

x = 4

Therefore, it would take 4 years without a claim for Option 2 to break even with Option 1. After 4 years, the savings from the lower premium on Option 2 would offset the higher deductible, resulting in lower total cost.