When shopping for homeowners insurance, we most commonly hear about looking for the best premiums. While insurance premiums are important, understanding and choosing the right deductible is just as vital. Having an affordable deductible is critical to getting the most out of your homeowners insurance policy.
So, what is a deductible for your homeowners insurance policy and how can you ensure you’re selecting the right one?
What is a deductible in insurance?
What is a deductible? An insurance deductible is the amount of money you are responsible for paying out of pocket if you make a claim. Do not confuse this with insurance premiums, which is the fee you pay an insurance company to give you coverage.
In general, there is an inverse relationship between premiums and deductibles. The higher the premium you pay, the lower your deductible will be. Similarly, the lower the premium you pay, the higher your deductible will be.
How do homeowners insurance deductibles work?
How do insurance deductibles work? Let’s say you have a homeowners insurance deductible of $1,000 and get roof damage resulting in an insurance claim. If the roof replacement costs $10,000, you will be responsible for paying the first $1,000. This means you will cover $1,000 of your roof replacement, and your insurance company will cover the remaining $9,000.
Types of homeowners insurance deductibles
There are two main types of homeowners insurance deductible. These will be defined in the policy:
- Dollar-amount deductible: An insurance policy with a dollar-amount deductible will define a specific dollar amount that you must cover as a deductible. In the roofing example above, we used a dollar-amount deductible of $1,000.
- Percentage-based deductible: An insurance policy with a percentage-based deductible will define a specific percentage of your home’s insured value to be the deductible. Let’s say your policy defines a 2 percent deductible and your home is insured for $150,000. In the event of a claim, your deductible will be 2 percent of $150,000 or $3,000.
How to choose a homeowners insurance deductible
If you’re shopping for homeowners insurance, you’ve most likely already determined what annual premium you can afford. If you haven’t, consider both the premium and the deductible costs.
Think about what deductible you can reasonably afford if you must file an insurance claim. Consider your budget and whether you have emergency savings to help cover things like unexpected insurance deductibles. The deductible you select should not be so high that it creates a financial hardship for you if you have to pay it.
If you determine that you can reasonably afford a deductible of $1000 if you file a claim, tell your insurance agent so they can quote your premium and deductible appropriately.
How your deductible impacts your homeowners insurance rates
Remember that to get a lower deductible, you must pay a higher premium and vice versa. This is all tied to whether you or the insurance company takes a greater financial risk.
Some homeowners are willing to take a bigger financial risk to pay a lower annual premium, in hopes that they will not need to file a claim. This means they have a lower annual premium but will be responsible for a higher deductible if a claim is made. Others may be more risk-averse and are willing to pay a higher annual premium to avoid a larger deductible all at once if a claim must be made.
We spoke directly with a State Farm office to get some real numbers to illustrate how the deductible affects the premium and vice versa. These numbers are based in Kentucky and will vary by state.
Let’s say you are insuring a home for $150,000. If you select a dollar-amount deductible of $1,000, your annual premium will be around $850. If you select a deductible of $2,000, your annual premium will be around $780. Notice that as you assumed more risk by accepting a higher deductible, your annual premium decreases. Insurance companies like State Farm often offer deductible options as high as $5,000.
As a homeowner and steward of your financial well-being, you have to decide which is right for you. Whatever you decide, remember that homeowners insurance premiums and homeowners insurance deductibles are directly interrelated but are two separate costs and are both necessary costs in maintaining homeowners insurance.
When you get quotes, talk to your chosen insurance provider about its deductible insurance options so you can look at the specifics of how much you pay for your premium and how much you’d pay if you need to file a claim. Getting a quote can help make your decision a little easier because you can look at your budget and savings to determine the right deductible for you.
Frequently asked questions about deductibles
What is the best deductible for homeowners insurance?
There’s no right answer to this. Many homeowners opt to have a $1,000 deductible because this amount tends to lower monthly premiums by a significant margin. Of course, if you do this, this means you won’t be calling your insurance company for small issues. Learn how to tackle routine maintenance issues on your own, or to find a competent handyman whom you trust and can easily afford. Many homeowners end up spending about 1 percent of their home’s purchase price on yearly issues. So, if you can, try to put that amount away in a savings account for when issues occur (and they will).
What does it mean when you have a $1,000 deductible?
A $1,000 deductible is the amount you pay before your insurance company steps in. For example, if you have a plumbing pipe burst and the water does $5,000 worth of damage to your floors, your insurance company would pay for $4,000 worth of repairs while you would be responsible for the remaining $1,000. To be clear: you are not sending any money to your insurance company ‘to pay’ for a deductible. A deductible, instead, is the amount you are expected to contribute to help pay for any damages or repairs when they occur.
Are home insurance deductibles tax deductible?
Most of the time they aren’t. However, there is one situation where you can deduct any losses and that is when your home is affected by a federally declared disaster.
How do I get my homeowners insurance deductible waived?
It is usually very difficult to do this unless your home has been completely demolished and needs to be rebuilt from the ground up. Your policy will need to have a waiver of deductible clause, though, in order for this to be possible.
Is it better to have a high or low deductible for home insurance?
It depends on your situation. The lower your deductible is, the higher you’ll pay in premiums. If you can comfortably set a large amount aside to pay for any maintenance issues, then you’ll save a lot of money over time. However, if you are unable to do this, then it doesn’t make sense to have a high deductible. Should something happen, you wouldn’t be able to pay for it yourself. Look at your deductible options, and ask yourself what you could comfortably set aside for only home maintenance issues. The money would not be a universal emergency fund. It would only be set aside for your home.