How to choose the right home insurance deductible.
One of the most common mistakes that we see people make is choosing the wrong deductible when buying home insurance. Every policy has a deductible and the choice that you make can drastically impact what you pay for your policy.
What is a Homeowners Insurance Deductible
So what is a deductible? The deductible is the amount of money that you have to write a check for out of your own pocket for damages before the insurance company will pay for a claim. What I mean by that is you don’t actually have to pay the deductible like you would a bill but the insurance company will reduce the amount of money they pay for damages by that amount is because it is your responsibility.
If you file a claim and it is covered, the deductible is subtracted from the total amount of actual damage. So for example, if you have a $1500 deductible and you file a claim for covered damage in the amount of $10,000, the insurance company would pay you $8500 for that claim.
Types of deductibles
there are generally 2 different types of deductibles that you’ll find on homeowners insurance policies.
Flat Deductible – a flat deductible is a fixed dollar amount that does not change. Ex: $1500, $2500, $5000 etc.
Percentage Deductible – a percentage deductible is calculated as a percentage of the total amount of coverage you have on your home. If you have your home insured for $250,000 and you have a 1% deductible (250,000 x 1% = $2,500 deductible)
There are a couple of things to know when you have a percentage deductible:
- Every year when inflation causes building costs to rise, the amount of coverage for your home most likely increases to keep up with that inflation. So as the amount of insurance you have increases so does your deductible.
- You may have a mixture of Flat and Percentage deductibles on your homeowners policy. In many areas, you can have a flat deductible for everything except wind and hail may have a percentage deductible. Therefore if you have a claim due to the wind and/or hail damage, expect to do the math to figure out your deductible from this type of damage.
How to choose a deductible for your policy
One of the biggest mistakes we see people make is they either are not working with a knowledgable insurance agent who explains how the insurance policy works, or they just don’t take the time to learn about it until its too late.
Insurance originally was intended to provide coverage for situations where it would destroy you because you could not afford to recover from a situation on your own. Therefore you transferred the risk of that large financial burden to an insurance company that spreads the risk out among many people.
The deductible should reflect the maximum amount you could afford to lose and not ruin your lifestyle.
It is in your financial interest to carry as high of a deductible that you can handle for two reasons, it can reduce the cost of your insurance 27% or more in the short term. In the long term, assuming you don’t have multiple claims ongoing, you will keep more money in your own pocket instead of sending it to the insurance company.
What most people don’t realize is that the insurance companies are really good at math, and they know that the lower your deductible you purchase, the more money they make. So there is a happy balance, they want the minimum deductible to be high enough they don’t go broke, but low enough that you end up spending more than you have to.
A general rule of thumb is to carry a deductible that is a minimum of 1% of the RECONSTRUCTION COST to build your home in today’s dollars. Please note, I said reconstruction cost because that is TOTALLY different than what you paid for your home.
We will get into that in a different article, but it always costs more to clean up damaged property than it does to build it fresh and new because the cleanup cost can be a TON more than most people think. In fact, every claim we have assisted with, the homeowners have been shocked at how much it cost to just clean up damaged items.
But what about the claims surcharge?
Another great reason for raising your deductible is because of the claim charge after you file a claim. Every insurance company is different…
did he just say every insurance company is different?
Yes! Every insurance company is different, there are not any two that are the same. Hard to believe after watching all the stupid insurance commercials on tv, I know!
But, typically if you file a claim for any amount, the cost of your premium will increase because you have now become a riskier and costlier homeowner to insure from the insurance companies perspective. EVEN IF THEY DON’T PAY!
It still costs the insurance company a few hundred dollars to respond to every claim they receive, so even if you file a claim that ends up being a Zero pay or not covered, it still costs them money and they have to raise the rates for everyone.
And the more claims you file, the higher your premium will be.
Each claim follows you for typically 3 years but we are seeing some looking at a 5-7 year history now!
For those reasons, there are circumstances in which even if you have a low deductible, it might not be in YOUR best financial interest to file a claim especially if the damage cost is less than or equal to your deductible.
So consider talking to an independent insurance agent that can properly counsel you about real coverage options and deductible factors from many different companies.
How Your Deductible Impacts Your Home Insurance Rates
Remember when I said every insurance company is different earlier? Ok, yeah every insurance company has a different rating method to the different deductible amounts.
So, risk management 101 says not to risk more than you can afford to loose
It also says, Don’t risk a lot for a little.
So just because you can, doesn’t mean you should. Let’s break down how to find the best home insurance deductible for you. Yeah, YOU, not your friend or neighbor. Cause let’s be honest, math is hard for most people.
So consider this, current deductible equals current premium
Now ask your independent insurance agent to tell you what the premium cost would be for the next higher deductible option.
In our area, minimum deductibles typically are in the range of $1500, most commonly the last few years $2500.
So if you have a 1500 deductible, ask what it would cost for $2500, etc. Make sure they tell you what the total annual premium savings would be. For example, you could save $200 for the year
Now if you can save $200 for the year seems pretty good right? Except you now have taken on an additional $1000 risk IF, and I repeat IF you file a covered claim. 2500 new deductible minus 1500 previous deductible = $1000 difference.
How many years will it take before you are Over Paying on your homeowners’ insurance?
$1000 risk / $200 annual savings = 5 year break-even
This means, year 6 you are SAVING MONEY on your home insurance! and year 7 and 8 and 9 and 10 and… until you file a covered claim!
When was the last time you had a covered claim on your home? Ok and now think about the time before that and before that if there even was one. See my point?
The average homeowner has a claim every 11 years or so, if it has been longer than that then you are better than average risk.
Our rule of thumb is that if you can save enough on the savings by increasing your home insurance deductible, that the premium savings can equal the difference in deductible within a 7-9 year period, it is a pretty good option to consider.
Now take it one step further, open a savings account at your bank, and name it the deductible savings account. Put the deductible savings amount in the bank each year instead of paying the insurance company and you now have an emergency deductible savings fund.
Now if you want to amplify this effect, take this same concept and apply it to all of your insurance policies! Now you are getting more for less.
Quit overpaying for your insurance by using one of the few pieces that you actually have control of! Increase your deductibles to an efficient level until you build your deductible savings account, then once you have enough saved in there to cover your deductible, you can push the home insurance deductible higher and save even more.
If you have questions, at any time or need some advice on what the perfect deductible for you is, reach out to our team of insurance advisors to help!