Picking a home insurance deductible is a very critical financial decision. However, deciding on the right amount for your insurance deductible can be complicated, since you never know when you will be using it. Furthermore, for each policy, there is no one particular solution that fits all circumstances. Keep reading to learn how to choose the best deductible for your needs.
What is a Homeowners Insurance Deductible?
A homeowners insurance deductible is the amount of money you must pay from your own pocket towards a claim prior to the insurer paying its part.
Let’s say you have a $1000 deductible on your policy. If your property bears trivial damages that cost $980 to fix, your insurer is not going to pay anything since your claim is less than your deductible. You shouldn’t even file a claim in this case since your insurer is not required to pay out for claims that are lower than your deductible.
On the other hand, if your home suffers far worse damages and the total bill amounts to $15,000, you have to pay up $1000 from your own pocket and your insurer will pick up the bill for the remaining $14,000.
Deductibles vary by hazard. Most normal claims will fall under the standard home insurance deductible including burst pipes, theft, fire, and so forth. Other home insurance claim types, like the ones against your guest medical or liability coverage, hardly ever come with a deductible. Some policies have a separate deductible for windstorm damage, especially in states that are prone to hurricanes.
Deductible and Liability
Apart from insuring your structures and personal property, your policy protects you from personal liability caused by accidents in your home. However, unlike your property coverage, you don’t pay a home insurance deductible on liability claims.
How to Pick a Homeowners Insurance Deductible
Generally, you should consider three things when selecting the best homeowners insurance deductible for yourself.
Your risk tolerance
Would you rather pay more each month but have lower costs during a disaster? Or would you rather have lower monthly payments but pay more upfront in the case of a claim?
Insurers design products this way to persuade homeowners to shoulder some of their own risks. It also keeps administrative costs low by preventing homeowners from filing numerous small claims. Premiums would be greater for a policy with a $1000 deductible versus one with a $1,500 deductible. This is because, in the second policy, the homeowner chooses to take on a higher financial risk. They would have to fork out $1,500 toward a claim instead of $1000 if they had to make one.
When choosing a homeowners insurance deductible, you want to balance the long-term expense of a policy (your monthly insurance premiums) and the short-term expense of a surprise claim so that you can afford both.
Your financial situation
How much can you pay out of pocket before it becomes a hardship? That will help you decide how high to set your deductible. In the instance of a claim, can you absorb the discrepancy between the lower and higher homeowner insurance deductible? If you had several claims, how would the extra cost affect you?
Consider your available emergency funds with an eye toward footing the bill for your home insurance deductible. If you have money saved, your home insurance deductible ought to be as high as you can afford since the greater your deductible, the lower your monthly premium costs. Bumping up your home insurance deductible can slash down the expense of your homeowners insurance premium by up to 20 percent. Although increasing the deductible can bring down your rates, it should not come at the expense of financial unease. It’s imperative to have a liquid emergency fund in case an unpredictable event arises. Homeowners insurance deductible may be one such event; hence, it is in your best interest to consider what money you have saved for a contingency when selecting your home insurance deductible.
Your premium costs
A higher deductible may lower your monthly payments, but does it lower them enough to matter? Let’s say you have the choice between two plans: one with a $1,000 deductible and another with a $1,500 deductible. If you opt for the $1,000 deductible, will the payments be $500 greater per year than your other plan? If so, you may be better off with the $1,500 plan since you’ll have more savings. If you choose the $1,500 deductible, do you save an extra $500 per year on premiums compared to the other plan? If you’re not saving that much, you may as well take the lower deductible and get better protection.
What are the Different Types of Homeowners Insurance Deductibles?
There are generally 2 types of home insurance deductibles that you are likely to find on the declaration page of your policy:
- Standard deductible: Also known as flat deductibles, they have a fixed dollar amount. The majority of perils use these deductibles.
- Percentage Deductibles: These are based on a percentage of the insured value of your home. They are typically used for catastrophic events, like hurricanes or tornadoes, which can completely destroy your home. Add-on policies like flood and earthquake may also use percentage deductibles.
Standard Homeowners Insurance deductibles generally fall in the range of $500- $2,000. Percentage deductibles usually fall between 1% and 5% of your home’s insured value.
In both of these cases, the deductible is paid first by the homeowner before the insurance company will pay out their share.
This is the most common type of home insurance deductible. It is the fixed-dollar amount that the homeowner provides out of pocket when you file a covered loss claim. Generally, a standard homeowners insurance deductible falls within the 500 to 2,000 dollar range. However, higher and lower home insurance deductible plans are available for those in unique circumstances.
This is how standard deductibles work: if your deductible is valued at $1,500 and you file a garage claim that sums up to $5,000 in damages, you pay up the first $1,500 of the repair expenses from your own pocket before your insurer hands you a check for the remaining amount of $3,500.
Compared to standard deductibles, percentage deductibles are not as common in home insurance policies. However, the latter is required in several states perpetually impacted by windstorms and hurricanes. A percentage deductible is calculated based on your dwelling coverage’s percentage (generally one percent to three percent).
Let’s say you have $200,000 in dwelling coverage and select a 4 percent deductible, you will have to pay over $8,000 / claim before your insurer steps in to pay for the remaining amount of the damages. Although it is generally true that higher homeowner insurance deductibles equate to less money in premium payments, that is an exorbitant amount of money to fork out at once!
However, if you have $100,000 in dwelling coverage and a 1% deductible, you will have to pay $1,000 per filed claim. Individuals who have greater valued homes usually select the dollar amount standard deductible and skip the percentage deductible option.
How much Should My Home insurance deductible Be?
There is no hard and fast guideline for the ideal homeowners insurance deductible.
Unfortunately, there is no such thing as the ideal home insurance deductible for every policy. Every homeowner should evaluate their own requirements and needs, how much can they truly afford to pay in premiums every month, and how much money they can pay from their own wallet comfortably for small repairs and when a big disaster strikes.
For example, if you are middle class, consider your finances carefully and assess which home insurance deductible is best suited for your circumstances. If you feel 1,000 dollars is manageable, but 2,000 dollars is a stretch for your savings, then it is best to select the lower deductible so that you know you can pay it without worry if there is a claim. Although you will not save as much as if you select the higher insurance premium, you will still be content knowing that your property is protected.
On the other hand and as stated above, if you are well off and money is not an impediment for you, you should raise your home insurance deductible as high as you can afford. That is because the cost of your premium is inversely proportional to your deductible cost (the higher your home insurance deductible, the lower your premium’s cost).
If you want to select the best home insurance deductible that is aligned with your needs and circumstances, a wise course of action would be to get in touch with a reputed insurance company or agent who will be more than happy to help you make this decision.