When selecting a homeowners insurance policy and setting its terms, you will be called upon to choose your deductible. This is the value you will have to pay out of pocket upon making a claim before the insurer begins paying to offset your expenses.
A lower deductible means you’ll be more financially secure in the case of a disaster, with less spending on your part. On the other hand, insurers may lower their rates if you are willing to take on a higher deductible.
It’s important to give detailed consideration to your deductible options and not make a quick or impulsive decision. Your choice in this regard can play a large part in determining how much you spend over the lifespan of a homeowners policy, and how prepared you are to handle a disaster that causes damage to your home.
The first step in deciding which deductible option to pick is to comprehend what an insurer is offering you. Your options will differ from one state to another due to differences in regulations, but the same general theories apply everywhere.
Dollar vs. Percentage Homeowners Insurance Deductibles
A deductible will likely be framed as either an amount in dollars or a percentage of the home’s value. Unpacking those calculations is a great first step in picking a deductible that makes sense for you.
The Insurance Information Institute is a solid source of guidance and context on how to determine the meaning of a percentage-based deductible or a dollar-value figure, noting that while the two varieties are calculated in unique ways, their actual application when you make a claim is similar.
A dollar amount deductible provides a clear way of determining how much is taken from a given claim. You select an amount, with minimums often starting at $500 or $1,000, and take that amount from every claim affected by the deductible.
The III noted that some claims don’t cause the deductible to take effect, but for all those that do, you’ll know exactly how much you’re responsible for before the insurer starts paying.
In the case of a percentage deductible, you’re still paying a fixed value out of pocket before collecting insurance money on a given claim. The difference comes from how the value is set.
The III noted that the percentage cited is based on the insured value of your home. Therefore, a home worth $200,000 with a 1% deductible would functionally have a deductible of $2,000.
3 Critical Facts to Know About Homeowners Insurance Deductibles
While it’s fairly simple to calculate the effects of a deductible, as well as how much you’ll have to pay on a given claim, there are some extra points to consider when choosing a policy and setting a deductible.
It’s important to learn this information before you purchase or modify a policy to ensure the coverage options you’re receiving reflect your financial needs, both month-to-month and in the case of an incident that requires a claim.
1. Different types of coverage may come with different deductibles
When shopping around for insurance options, you may find the deductible options for a standard homeowners policy are different across providers and levels of coverage.
As with all kinds of insurance purchases, you should get quotes from multiple providers when selecting the coverage for your home. The Balance also noted that extra coverage types such as flood and earthquake insurance may come with unique deductibles different from those on your standard policy.
Once you understand the possible minimum deductibles available across all your homeowners insurance products, you can determine what level you’re comfortable increasing these various deductibles to.
While your first instinct may be to go either as low or as high as possible across the board, seeking to enable better claims service or lower premiums, the correct option for you likely lies somewhere in the middle.
2. There are situations in which the deductible is not charged
Deductibles on homeowners policies don’t impact all kinds of claims, and you should make sure you’re clear on which incidents do and don’t apply when you purchase new coverage or update your policy.
The III explained it’s common for home policies to mainly charge deductibles on repair and rebuilding claims, centering on events that cause property damage rather than harm to individuals or the legal liability that comes along.
A liability portion of a homeowners policy applies to expenses such as legal costs when a visitor is hurt, or medical expenses when an individual suffers an accident on the property.
The III stated that these halves of policies often have no deductible, meaning the insurer will respond to a claim or lawsuit immediately, not expecting you to pay the deductible.
3. It pays to know how a deductible applies to claims
When you’re getting ready to make a claim, it pays to determine early on whether the value of the claim is likely to be higher than your deductible. If the claim is smaller than your deductible, you won’t receive any financial assistance from the insurer.
In cases such as these, the III noted that it’s likely best to stop making the claim entirely, as the full claim-filing process isn’t worthwhile when you won’t receive any money. You should reach out to your insurance professional to determine whether you have coverage, what the timeline is to file, and whether the deductible will make you unable to collect.
The Balance noted that it may be worthwhile for some homeowners to intentionally inflate deductibles so they won’t make as many claims as they currently do. This is because making more claims tends to raise insurance premiums, and therefore, the overall number of claims made should be kept low whenever possible, for the sake of long-term expenses.
4. Disaster types have special deductible rules
The exact nature of deductible rules changes based on the type of incident causing damage, as the III explained in detail. Hurricanes and tropical storms, for instance, may trigger special considerations depending on which state you live in. Inland states may have specialized rules for wind and hail instead of coastal storms.
Hurricane and wind deductibles are typically percentage deductibles, the III noted, while also pointing to Florida’s special rules: In that state, hurricane coverage deductibles are calculated by the hurricane season rather than by the claim.
This means if you’ve used up your whole deductible on a hurricane-based claim, you don’t have to pay a deductible on further property damage claims arising from storms that season.
When dealing with special hazard insurance, you may also end up dealing with percentage deductibles. This coverage, which isn’t included in homeowners policies, is sold at different rates based on states’ risk levels.
Flood insurance, which is required in coastal regions, may be purchased with a variety of deductibles, with home and belongings coverage sometimes having different rates within the same policy.
How to Choose the Best Homeowners Insurance Deductible
The actual deductible that will be right for you is based on your financial comfort level. Imagine your home suffering a disaster that seriously damages its structure and contents.
How much money are you reasonably able to pay out of pocket to restore things to working order? Pushing your deductible higher, up to that highest value you are comfortable with, is the way to drive premiums down, as insurers will be glad to see you taking on more financial risk.
With that said, you should not go beyond your means and thereby assume you will never need to file a claim. Insurance is meant to be there for you when disaster strikes, and if you’ve selected a deductible that is too high, your policy won’t be able to help you.
While month-to-month savings are a valuable goal to pursue, you don’t want to save money at the expense of your peace of mind.
As with all elements of insurance purchases, it pays to consider what options insurers are giving you for deductibles. You can shop around with various providers and negotiate to receive rates that make sense for your financial means.
With policy offerings varying based on region, property type, your relationship with the insurer, and more, there is no one answer to the question of an ideal deductible amount. If you do some research, however, you can find the right answer for you.*While we make every effort to keep our site updated, please be aware that "timely" information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Huntley Wealth & Insurance Services and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.