Just like your auto insurance, health insurance and other policies that protect you, your loved ones and your belongings, homeowners insurance policies come with a deductible. Figuring out what your deductible should be is a little bit different for each of these, though.
When it comes to your homeowners insurance, your bottom line is the most important factor in determining your deductible – how much you can afford to pay out of pocket should you need to file a claim. Here’s everything you need to know about homeowners insurance deductibles and how to choose the right amount for your personal situation.
What is a deductible?
A deductible is the amount of money you as a policyholder pay out of pocket when you file a claim for damages or loss. Your insurance company covers the remainder of the cost of the claim. If you have a $1,000 deductible and you file a claim because a tree fell on your house and it’s determined it will cost $6,500 to fix the damages, you will pay the first $1,000 of the repair costs and your insurance company will pay you the remaining $5,500 to cover the remaining costs.
How should you choose your deductible?
The first thing to consider when determining your deductible is how it will affect your premiums. The higher your deductible, the lower your premiums, and vice-versa.
With that in mind, we asked William Davis of the Insurance Information Institute if there are any benefits to choosing the lowest possible deductible other than saving money on your out-of-pocket expenses when it comes time to file a claim.
“There really aren't any other benefits other than having to pay less out of pocket in the event of a loss,” he said. “But policyholders should discuss their individual situation and insurance needs with their company representative or agent to ensure they understand their coverages, the deductibles that are available and how those things will affect them in the event of a loss.”
He also noted that deductibles can be a very important issue in some areas, particularly in hurricane-prone places.
“Policyholders need to determine how their state's hurricane deductibles – which are a percentage of the home's value instead of a [set] dollar amount (they vary by state) – will impact their ability to handle the total amount they would have to pay out of their own pocket in the event of a loss.”
How your deductible affects your premiums
Raising your deductible can have a significant impact on the premiums you pay each year. In general, a higher deductible – let’s say $1,000 per incident instead of $500 – can result in lower, known out-of-pocket expenses throughout the year. It could, however, cause you higher, unknown expenses in the event you have to file a claim. Or two. Or three.
Of course, there are ways to reduce your premiums beyond deciding what your deductible should be. There are plenty of discounts you’ll want to be familiar with, like bundling your homeowners policy with your auto policies, autopay discounts and many others.
To determine what deductibles are best for you (and what discounts you may qualify for), it’s a good idea to talk to an independent insurance agent who can help you compare policies from a variety of insurance companies, find the right limits of coverage for the value of your home, choose whether to choose replacement cost or actual cash value and other decisions specific to your home and your financial situation.
The Insurance Information Institute has a primer on what you need to know to make sure you have adequate homeowners insurance coverage.