How to Choose the Right Homeowners Insurance Deductible: 10 Things to Consider
Choosing a deductible is a big financial decision.
If your deductible is too high, you might be unable to make a claim – or unwilling to ever use your insurance.
If your deductible is too low, then you might pay too much for premiums.
It’s not a perfect science, but here are 10 things to consider when choosing a deductible.
Could You Afford a Surprise Deductible Payment?
Your homeowners insurance deductible should be an amount you can afford to pay. If you came home to a burned-down house and needed to pay $5,000 to make a claim, would you be able to afford it?
Consider the size of your emergency fund and other cash you have on hand. Do you have enough cash to cover your homeowners insurance deductible?
Do You Anticipate Making a Claim?
Some homeowners go their entire lives without making a homeowners insurance claim. Others make five claims in 10 years through no fault of their own.
There’s no way to see the future. However, you can determine the risk of a claim by considering multiple factors:
- Do you live in an area with a high risk of natural disasters?
- Does your home have old pipes, materials with a higher fire risk, or other items that increase the risk of a disaster?
- Do you have pets or kids that could increase the risk of a major claim?
There’s no “perfect” answer here. However, you can answer the questions to the best of your knowledge today to make an informed decision.
How Much Do Premiums Change with Higher or Lower Deductibles?
Sometimes, a higher deductible doesn’t save as much money as you think.
In other cases, you save thousands per year by raising your deductible.
Contact your insurer to determine how much your premiums change based on your deductible. If raising your deductible from $5,000 to $10,000 only saves you $50 per year, for example, then it may not be worth it.
What’s Your Breakeven Point?
After answering the questions above, you can determine your breakeven point.
Let’s say raising your deductible from $5,000 to $10,000 saves you $500 per year on homeowners insurance.
You would need to go 10 years without a claim to break even. If you make more than two claims in that 10 year period, then it would have been better to choose the cheaper deductible.
Do the Math on Percentage Deductibles
Many insurers now use the value of your home to calculate a deductible:
Some fire insurance policies, for example, offer huge cost savings when you switch to a deductible based on the value of your home. You might pay 5% of the value of your home as a deductible, for example, to save $1,000 per year on homeowners insurance.
Some hurricane and windstorm insurance policies have a similar option – particularly for named storms. You might pay a “named storm deductible” based on the value of your home, for example. Instead of paying $2,500 for an ordinary windstorm insurance claim, you might pay 5% of the value of your home when it’s damaged by a named hurricane.
Some insurers give you the option. You can choose a flat deductible or a percentage deductible. Typically, percentage deductibles are much higher but reduce premiums. Flat deductibles are lower but have higher premiums.
Generally, these deductibles are for uncommon, severe weather events. Depending on your budget and aversion to risk, however, it’s important to consider which deductible works best.
When Do You Pay Your Deductible?
Most insurers simply subtract your deductible from the claim.
Instead of cutting your insurer a check for $2,500 after a windstorm claim, for example, your insurer will simply deduct your $2,500 deductible from the claim. If your home had $10,000 in damage from a recent windstorm, for example, then you might receive $7,500 in compensation to cover the loss.
Contact your insurer to determine when you pay your deductible. It could influence how you set your deductible.
What’s the Average Deductible?
Overwhelmed? That’s okay. Many homeowners simply choose a similar deductible to everyone else.
The average homeowners insurance deductible in the United States, according to Liberty Mutual, is $1,000. Some homeowners have deductibles as low as $100, while others have deductibles of $5,000 or higher.
Are You Okay Fixing Smaller Damages Yourself or Paying Out of Pocket?
If you have a higher deductible, you’ll likely make small repairs yourself – or pay out of pocket for smaller repairs.
Let’s say a windstorm breaks your window. It’s going to cost $2,000 to replace your window. Fortunately, your homeowners insurance deductible is $500, so it’s in your best interest to make a claim. You pay $500 and your insurer covers the remaining $1,500 in repairs.
If your homeowners insurance deductible is $2,500, however, then you’re not going to make the claim. You’re better off paying for repairs out of pocket.
Remember Homeowners Insurance Rates Rise with Each Claim
Having a low deductible may make sense if you anticipate making lots of claims in a short period of time.
However, it’s important to remember homeowners insurance premiums rise with each claim you make. The more claims you make, the more you’ll pay for premiums at each renewal.
Eventually, if you make too many claims in a short period, your insurer will cancel your policy.
Not All Coverages Have a Deductible
It’s also important to remember not all homeowners insurance coverages have a deductible. You might make a claim on certain parts of your policy without needing to pay anything.
Types of homeowners insurance coverages without a deductible include:
- Personal liability coverage
- Medical payments coverage
- Additional living expense coverage
- Most endorsements, scheduled personal property coverage, and riders
Most of your homeowners insurance coverages do come with a deductible, including claims made under dwelling coverage, other structures coverage, and personal property coverage.
Final Word: Consider Risk vs. Savings
Choosing a homeowners insurance deductible seems complicated, but it boils down to a simple problem: risk versus savings.
Sometimes, you choose a low homeowners insurance deductible and never make a claim for 30 years. Or, you might choose a high deductible and then make five claims in the next 10 years.
The point is: there’s no perfect deductible. However, by considering the factors above – and your personal financial situation and aversion to risk – you can choose the best deductible given the information available to you right now.
Stephanie is a property insurance claim expert with over 20 years of experience working as an insurance adjuster, expert witness, appraiser and umpire. She is passionate about sharing her expertise, knowledge, tips and training to help both property owners and Public Adjusters in their pursuit of effectively managing claims and recovering the claim settlement they deserve after a loss.
