Deductibles and your Homeowner Policy
The relationship between your homeowners deductible and premium can feel like a game of cat and mouse. Should I raise or lower my deductible? How much responsibility and risk should I absorb? Should I have a $1,000 deductible on my homeowners insurance, or should I opt for more or less to save on my premiums?
Let’s go through the basics of what a homeowners insurance deductible is and how you can choose the right number for you.
What is a deductible?
A deductible is the amount you are responsible to pay before your insurance kicks in to cover a claim (up to your coverage limits). The deductible is what’s “deducted” from your claim payment.
Let’s say your home is insured for $50,000 on your homeowners policy. You have a deductible of $1,000. Unforeseen water damage ends up costing you $3,000. When you submit a claim, you would be responsible to pay $1,000, and your insurance company would send you a check for the remaining $2,000 in lost property.
But let’s say that the water damage only costs $800. This is less than your deductible of $1,000, so your insurance company wouldn’t pay you anything.
Keep in mind that the insurer will only pay up to your coverage limits. Let’s say the water damage equates to $55,000 in damage. You would still be responsible for $1,000 due to your deductible. Then, your insurance company would cover $50,000 in losses, because that is the total amount of insurance coverage on your home. That means you would be missing $4,000 you would have to pay out of pocket.
How is a deductible determined?
There are two types of deductibles you’ll find in homeowners policies: dollar amount and percentage. The first type of deductible is more common. This specifies a dollar amount that you would pay out of pocket, like $1,000.
The second type is a percentage of the total amount of insurance on your policy. This only applies to homeowners policies, not auto coverage. This is based on the percentage of your home’s insured value. For example, your insurer offers a 2% deductible. Your home is covered for $100,000 in property damage (not including liability). That means you would have a $2,000 deductible.
When searching for or switching your home insurer, make sure you ask how that company determines your deductible and how much you maintain control over your own deductible rate.
Why is there a deductible?
Curious why deductibles even exist? The purpose of a deductible is to share the risk between you and your insurer. It makes sure you have some skin in the game.
If you didn’t have a deductible, you could make claim after claim and not have to pay a cent (although your premiums would likely increase). A deductible ensures you’re only submitting important claims, and you’re not taking unnecessary risks that could damage your home. It also helps prevent insurance fraud, because people are less likely to submit a claim if they have to pay out of pocket as well.
What does a homeowners’ deductible apply to?
Deductibles typically only apply to “hazard coverage.” Hazard coverage involves property damage to your house or personal belongings. This usually also includes “additional structures” under Coverage B, which is part of a standard homeowners property policy. Still, you’ll want to talk to your insurance agent to determine your deductible for Coverages A and B.
Deductibles don’t usually apply to liability coverage, which is when a guest is injured in your home or on your property. Often your insurer will pay the full amount for any liability claims (up to your coverage limits).
How much should my deductible be?
Most homeowners get stuck on this question. A higher deductible usually means a lower premium (monthly payment), while a lower deductible means a higher premium.
But which deductible-premium ratio is better?
Most insurers set the average minimum homeowners deductible at $1,000, while others put the minimum at $500. Most insurers will allow you to raise the deductible if you’d like. Some deductibles can be raised to as much as $10,000.
But does that mean you want the minimum deductible amount? Sometimes yes and sometimes no.
How much can you pay out of pocket?
Raising your deductible is the most effective way to lower your monthly premiums on your homeowners insurance. But, if you were to make a claim, you would have to pay that deductible before the insurance company will pay you. That means you need to still be able to afford that deductible.
For example, if you were to have a $5,000 deductible, you would only start getting paid by your insurance company if the damage were more than $5,000. You would be responsible for 5 grand before the insurance company would even consider sending you a check. If you don’t have $5,000 to pay out of pocket for an incident, you don’t want a deductible that high.
Ultimately, you want to balance the short-term cost you could potentially afford in the case of a claim (the deductible) with the long-term cost of your overall policy (the monthly premiums). The more you could pay out of pocket for your deductible, the more you’d save in the long-term.
We generally recommend raising your deductible as much as you can reasonably afford without impacting your wallet. How much could you pay out of pocket today without it seriously impacting your finances?
Fewer claims means a higher deductible.
Some people also raise their deductible because they don’t make a lot of claims anyway. Every time you make a homeowners claim, your premiums will go up. So you likely wouldn’t want to make a claim for low-cost losses anyway. In that case, it may be in your best interest to have a higher deductible so you’re only worried about paying that cost in the case of a major disaster or large claim.
For example, if your deductible is $1,000 and you have a claim for $1,500, you would only get an insurance check for $500 but your future premiums would likely increase drastically. So you might not submit that claim anyway.
If you’re only submitting large claims, you may want to have a higher deductible. Then you’d save more in premiums in the long-term, and you’d only worry about the deductible cost in the case of serious incidents.
Pro-Tip: Create a deductible-specific account.
Want to make sure you would be able to pay your deductible out of pocket? Put the money aside in its own savings account (where it can collect a little bit of interest anyway). This ensures you’re always protected in the case of a disaster.
Also, the amount you save in your deductible account could equate to your deductible. If you used to have $1,000 in the account but now you can set aside $2,000, for example, you can talk to your insurer about raising your deductible and lowering your premiums.
What are disaster deductibles?
Your insurer may have different deductibles for different types of losses. Although wind, hail, and hurricanes are usually covered under your standard homeowners policy, they may each have their own unique deductible. Flood and earthquake deductibles may vary as well.
Hurricane, wind, and hail deductibles can often be higher than the standard homeowners deductible, especially if you live in an area prone to these sorts of disasters. Your insurer might require a percentage-based deductible rather than a fixed dollar amount. In some states, you have the option to opt out of paying the percentage deductible, but you’ll be stuck with a high premium.
Flood and earthquake offer a range of deductibles depending on the state and your insurer. Compare different options and shop around before making your decision (check out our Johnson & Rohan site www.homeownerquote.com). Call us at (781) 224-0909 to have us shop you with our different companies.
We often get asked, “So, should I have a $1,000 deductible on my homeowners insurance?” And our answer is always the same: maybe.
Your deductible should be the amount you are comfortable paying out of pocket in the case of damage to your home. We typically recommend $1,000 as the minimum to maintain fair premiums, but you may want to increase your short-term deductible to boost your long-term savings if you’re financially secure enough to pay for a larger deductible out of pocket.