What is a homeowners insurance deductible?
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?
Homeowners insurance deductible
What is a deductible? An insurance deductible is the amount of money you are responsible for paying out of pocket if you make an insurance claim. Do not confuse this with insurance premiums, which is the fee you pay an insurance company to give you insurance 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 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.
There are two main types of homeowners insurance deductible. These will be defined in the policy and agreed to by you.
- 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% deductible and your home is insured for $150,000. In the event of a claim, your deductible will be 2% 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. But 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 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.