Homeowner’s insurance protects your most valuable investment: your residence. Without homeowner’s insurance, you could lose your home and personal property to a fire, storm, or other calamity. In addition, if someone is hurt on your premises, your homeowner’s insurance pays for any liability judgment against you. Homeowner’s insurance policies are very affordable, allowing you peace of mind. However, many policyholders fail to pay attention to their homeowners insurance deductible, and that mistake can cost them big money.
What Is a Homeowners Insurance Deductible? 6 Things You Need to Know
Homeowners insurance deductibles are the amount policyholders must pay out-of-pocket for each claim. As with other types of insurance policies, the deductible represents the minimum size of the claim for insurance companies to take any financial responsibility. For example, if a policy has a $1,000 deductible, the insurance company will only pay out if the claim exceeds $1,000.
Homeowners insurance deductibles can be complicated. For the uninitiated, it can seem easier to just choose a deductible and forget about it until they need to file a claim. However, understanding how homeowners insurance deductibles work is essential to your financial security. Here are the six things about homeowners deductibles every homeowner needs to know.
1. Deductibles Are Per Incident
Health insurance plans have annual deductibles. The insurance company keeps track of a policyholder’s claims over a year and makes payments only on claims submitted once the threshold has been met.
In contrast, a homeowner’s insurance policy applies the full deductible to each separate claim. For instance, if a policyholder files a claim after a fire, the insurance company applies the full deductible to that claim. If the policyholder later files a new claim after a pipe burst, then the deductible is also applied to that claim, even if it occurs in the same year.
2. Insurance Companies Use Two Different Deductible Calculations
Before taking out a policy, it’s important for shoppers to understand how the insurance company calculates deductibles. This allows for homeowners insurance buyers to accurately compare and contrast policies. In addition, understanding the calculation allows policyholders to budget for out-of-pocket expenses.
Up until the 1990s, all homeowners insurance deductibles were a flat amount. For example, if you have a $500 deductible and a storm damages your house to the tune of $5000, then your insurance company pays $4,500, and you must come up with $500 to cover the repair costs.
Deductibles as a Percentage
Percentage deductibles remain rare in standard perils policies, which cover damage from fire, theft, and other typical damages but exclude acts of God, such as earthquakes and hurricanes. Many people who live in an area susceptible to earthquakes or hurricanes must carry a standard perils policy and a second policy to cover damage from a hurricane or earthquake.
As a result, they may have one homeowner’s insurance policy with a traditional deductible and one with a percentage deductible.
Most percentage deductibles range between 1% and 5% of the home’s value. As a result, percentage deductibles can be extremely high. Imagine an earthquake policy with a deductible of 5% of a home’s $500,000 value. The policy would not pay out a dime unless the damage exceeded $25,000. Even if the damage added up into the hundreds of thousands, the $25,000 out-of-pocket cost would still be out of reach for many households.
3. Increasing Your Deductible Saves On Premiums
Premiums are the periodic payments policyholders must pay to keep their homeowner’s insurance in force. Often, premiums take a significant bite out of a household budget, especially if your home is in a high-risk area. Policyholders can minimize premiums by increasing their deductible and still maintain the same coverage limits.
Most homeowner’s insurance policies come with a standard $250 deductible. If you increase the deductible according to the below table, premiums can be drastically reduced:
- $500- 10% to 12% savings
- $1000- 20% to 25% savings
- $2500- up to 30% savings
- $5000- up to 37% savings
By absorbing more risk, you reduce the cost of the policy. For households with enough savings to afford higher deductibles, this strategy can pay big dividends.
4. Deductibles Don’t Apply to a Total Loss
Imagine your home completely destroyed by a fire. It’s tough to find a silver lining in this situation. However, your homeowner’s insurance company will pay the entire cost of replacing the home without charging you a deductible. The possibility of a total loss is one of the primary reasons that homeowners insurance policies are so important for protecting a family’s financial future.
5. Deductibles Don’t Apply to Special Items
Most insurance policies allow you to add valuable items to your policy, so they are covered separately for a specific amount. This option, known as scheduling an item, allows policyholders to protect valuables, such as jewelry. Should a scheduled item be stolen or destroyed, the insurer will pay out the value without charging a deductible.
6. There Is No Separate Deductible for Living Expense Payments
Disaster, such as fires or tornadoes, often leave homes in an unlivable condition. When this occurs, most homeowner’s insurance policies cover the costs of living elsewhere. These payments cover hotels, groceries, and other necessities. As with scheduled items, these benefits come with no separate deductible. As a result, once your deductible is met, you are not responsible for any living expense costs unless they exceed the policy’s limits.
7. Choosing the Right Homeowners Insurance Deductible Is Key
Insurance experts recommend setting the deductible as high as you can realistically afford in order to save on premiums. However, although premiums can be reduced one-third or more, most homeowners should not set their deductibles that high because the potential for very high out-of-pocket expenses could leave the policyholder unable to afford to repair damage fully.
Choosing a deductible comes down to a balance between what you can afford in the short term if you have a claim and the long-term cost of the policy through premiums. Setting a deductible you can’t afford usually backfires because covering the out-of-pocket costs then requires making some financially destructive moves, such as charging expenses on credit cards. Most likely, the money saved on premiums would be far outweighed by the money lost to high-interest payments.
8. High Deductibles Have Advantages
Another reason to set a deductible high but affordable is that the insurance company is likely to raise your premiums substantially after a claim. From the viewpoint of an insurance company, it must raise your premiums because the advent of the claim indicates higher risk. If you have a low deductible, the premium increases could make keeping the policy a hardship.
Because insurance companies raise premiums substantially after a claim, it may not be worth it to file a claim, especially if you have a high deductible. For instance, if you have a $1,000 deductible and a $1,700 claim, you may be better off paying the full $1,700 out of pocket, provided you can afford to do so. The $700 you receive from the insurance company will most likely be offset by higher premiums, costing you more than $700 over time.
How Multiple Claims and Onetime Discounts Affect Your Premiums
Should you need to file multiple claims, your insurance premiums can skyrocket by as much as 25%. If you only file when claims are large, you are far less likely to file a long string of claims that indicate you are very high risk and prompt a severe rise in premiums.
In addition, many insurance companies provide a onetime discount to homeowner’s insurance customers who have never filed a claim. If you are benefitting from one of these discounts, filing a small claim may be the last thing you want to do. You would lose the discount and be bumped into a higher risk category, most likely costing far more in premium increases than you’ll collect in insurance proceeds.
Consider Your Emergency Funds
Financial experts recommend that each household have three- to six months of basic living expenses tucked away in an emergency fund. The fund should be liquid and kept in an account that does not suffer market risk. For example, money market funds are very safe but pay far higher interest rates than savings accounts.
Though higher deductibles are a better value than lower ones, it’s important not to set the deductible so high that a home disaster would wipe out your entire emergency savings. You may need those emergency funds for another purpose. For instance, imagine if you used your entire emergency fund to handle home repairs, and then your vehicle broke down. You may be forced to finance the vehicle repairs, breaking your budget while also resulting in high-interest payments. A lower deductible would be better in this situation as it would allow you to complete needed home repairs while also keeping your vehicle on the road without going into debt.
9. Insurance Mistakes Can Be Avoided
Homeowner’s insurance provides vital financial protection, but much of its benefits are whittled away when you make these common homeowner’s insurance mistakes:
Many homeowners defeat much of their insurance policy’s purpose by setting the deductible too high. The goal should be to never acquire debt or be forced to choose between fully repairing your home and paying other bills. This requires enough cash on hand to cover the deductible without draining your bank account to zero.
Policy Term Confusion
It’s important to understand all the policy terms before buying a homeowner’s insurance product. Often, buyers fail to read over what’s covered under the policy, which can result in not filing a claim for covered expenses. On the other hand, insurance buyers may assume certain types of claims are covered when they are not. For example, your policy may have exclusions for certain types of damage, such as hurricanes or floods.
One of the most dangerous misunderstandings involves the percentage deductible. If a policy has a percentage deductible, buyers need to calculate the amount of damage needed for the policy to pay out. In some cases, the deductible and premiums may be so high that it’s better to look elsewhere for insurance.
Life Change Reporting Forgetfulness
Many homeowners forget to inform their insurance company of life changes that affect their coverage. For instance, if you get a new dog, it pays to inform your homeowner’s insurance company. The new dog does result in a slight increase in premiums, but it also means that you are covered for liability should your dog injure someone. If you didn’t inform the insurance company so they could charge you the appropriate premium, they may probably deny any claims that result from the dog.
Specialty Items Assumptions
Often, homeowners assume their insurance covers all the personal property in the home. However, standard homeowners insurance policies exclude valuable items that most homeowners do not have. These can include expensive collections, such as high-value art, coins, and wine. Expensive jewelry and fancy wardrobes may also be excluded. If you own valuables, don’t assume they are covered. Check with the insurance company. Most likely, you can opt to add coverage of specialty items to your policy for a modest premium increase.
Homeowner’s insurance policies cover damage from casualty events, such as fires, wind storms, and water damage. However, they do not cover routine home maintenance or appliance replacements that result from routine wear and tear or age. Homeowners need to build a home maintenance fund for those expenses.
Homeowner’s Insurance Absolute Choice Insurance
Homeowner’s insurance provides the critical protection that guarantees you won’t lose the value in your home if a casualty event severely damages or destroys it. Absolute Choice Insurance provides homeowner’s policies that have a wide-ranging choice of deductibles. Choosing the right deductible is one of the most important insurance choices, and Absolute Choice Insurance offers professional advice on choosing the right policy and deductible for our clients.
To get started at finding the right insurance solution for you or your business, contact Absolute Choice Insurance today.
South Florida Phone: 305-275-1777
Central Florida Phone: 407-344-4444