One of the best ways to save money on your homeowners insurance coverage is by understanding how your homeowners insurance deductible works. By definition, a homeowners insurance deductible represents your share of the insured risk in an insurance contract. It’s the money you’ll have to pony up to repair or replace a covered loss. In other words, you file a claim and your insurance company deducts your share of the risk from the benefit pay-out.
Imagine you just bought a new home and are going to purchase homeowners insurance to protect your investment. How do you know whether or not to go with a high or a low deductible? The right answer is fairly nuanced and depends upon your particular situation.
Homeowners Insurance Deductible Options
Your homeowners insurance deductible is the amount you have to pay out-of-pocket toward any damages or loss that your homeowners insurance provider will pay for a claim. Unlike other forms of insurance, you don’t actually have to pay the deductible up front. Instead, the insurer will subtract the deductible cost out of the claim. So, if you file a claim for $15,000 and your deductible is $500, you’ll pay $500 towards repairs and the insurer will pay $14,500.
Generally, there are two types of deductibles:
- Dollar amount – The deductible is a set amount of money, such as $500 or more.
- Percentage – The deductible is a set percentage of the total amount of coverage provided by your policy. For example, if you insure your home for $300,000 with a 2% deductible, you’d pay $6,000 towards fixing the damages while the insurer would pay the remaining $294,000.
How Much Should Your Homeowners Insurance Deductible Be?
Unlike health insurance, where deductible is assessed on an annual basis against all claims, your homeowners or renters insurance policy typically stipulates that you must satisfy the deductible on each claim. Depending on where you live, there may be exceptions. In Florida, for instance, where there can be multiple hurricanes in one year, state law says hurricane coverage deductible must apply throughout the annual hurricane season versus per event. Overall, a lower deductible means you’ll pay a higher premium and a higher deductible results in a lower premium.
1. If You Raise Your Deductible
- You pay a lower premium. This route is especially helpful if you are struggling financially.
- Your out-of-pocket expenses when you file a claim are higher. One solution is to secure a line of credit (such as home equity credit, personal line of credit or credit card) you can turn to if necessary.
2. If You Choose a Lower Deductible
- A lower deductible results in a higher premium. If you are financially stable, paying a higher premium won’t be a hardship.
- You pay lower out-of-pocket expenses than you would otherwise, when you file a claim.
When making a decision about your homeowners insurance deductible, there are variables to consider. Here are some general tips:
- If you are strapped financially, a lower premium can help.
- Be sure to build up savings that will help you pay your deductible. Use a portion of the savings you receive due to a lower premium if you don’t have funds already on hand.
- Pay out-of-pocket rather than file a claim if the cost is less, equal to or a little more than your deductible when possible. A claim will likely result in higher premiums well into the future.
Find out more about homeowners insurance and get quotes from insurers using our online tool. Shopping around can help you save.