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There are a few steps to buying a homeowners insurance policy. After you choose your homeowners insurance coverages, you will need to choose a policy deductible, which is what you are responsible for paying after you file a claim. That’s why it’s important to choose a deductible that you can afford to pay out of pocket, just in case you’re stuck filing a claim.
That said, a higher deductible typically results in lower premium costs, but comes with higher costs out of pocket if you make a claim. A lower deductible, on the other hand, will typically raise your premium, but it means you have a smaller amount to pay if you find yourself in a situation where you have to make a homeowners claim. So, what exactly is a deductible and how can you know if you are selecting the right one? This guide will walk you through what you need to know to choose the right home insurance deductible.
What is an insurance 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 provide you coverage.
In general, there is an inverse relationship between premiums and deductibles. The higher your deductible, the lower your premium will be. Similarly, the lower your deductible, the higher your premium will be.
How do homeowners insurance deductibles work?
Let’s say your roof suffered damage from an incident that cost $10,000 in repairs. If the incident that caused the damage is covered under your homeowners insurance policy, your property insurer will help cover the repair costs. In this example, if your homeowners insurance deductible is $1,000, your insurer would cover $9,000 in costs, and you would cover the remaining $1,000 out of pocket.
Types of homeowners insurance deductibles
There are two main types of homeowners insurance deductibles. These will be defined in the policy:
- Dollar-amount deductible: A dollar-amount deductible will define a specific dollar amount that you must pay out of pocket in a claim situation. In the roofing example above, we used a dollar-amount deductible of $1,000.
- Percentage-based deductible: A percentage-based deductible will define a specific percentage of your home’s insured value (coverage A) to be the deductible. Let us say your policy defines a 2 percent deductible and your dwelling coverage is $150,000. In the event of a claim, your deductible will be 2 percent of $150,000 or $3,000.
Keep in mind, you may have more than one deductible for the same policy. For example, you may have a dollar-amount deductible for all claims except for hurricanes or named storms. For those claims, you may have a separate percentage-based deductible. Make sure you understand how to read your home insurance policy to know the types of homeowners insurance deductibles that apply to your policy.
How to choose a homeowners insurance deductible
Choosing a homeowners insurance deductible is part of applying for coverage. Not only should you know what annual premium you can afford, but you should also know what deductible amount you can afford. Follow these steps to choose a homeowners insurance deductible:
1. 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.
Learn more: Affordable home insurance companies
2. Determine your comfort level with 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.
3. Find out how your insurer manages deductibles
The insurance company will typically have you pay your deductible amount to the contractor working on your home. The company will then pay the contractor directly for the remainder of the damage costs, up to your policy limit. In rare cases, though, the insurance company may expect you to pay your deductible up front. Ask the company about their claims payment process so you understand it before you file a claim.
4. Weigh the cost difference if you change the deductible amount
Remember that to get a lower deductible, you must pay a higher premium and vice versa. Get home insurance quotes based on different deductibles to find the “sweet spot” between premiums and a deductible you can afford.
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 us 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 would 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.
Learn more: Average cost of homeowners insurance
Frequently asked questions about deductibles
There is 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 will not be calling your insurance company for small claims. 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).
A $1,000 deductible is the amount you pay in the event of a claim. 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.
Generally, home insurance deductibles are not tax deductible. If your home is damaged or a total loss because of a federally declared disaster, you may be able to deduct your home insurance deductible from your taxes. To find out for sure, it may benefit you to check with your financial advisor or tax representative.
Only in rare cases can you get your 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. Or, if you have a home insurance policy with a company like American Family, for instance, you may be able to get the diminishing deductible feature, which could decrease your deductible by $100 annually for each year you do not file a claim.
Whether you should have a high or low deductible depends on your situation. If you do not have savings and would struggle to pay a high deductible when you file a claim, it may be better to have a low deductible, even if it means having a higher premium. Likewise, if you have money saved to pay your deductible if you have to file a claim, you may want to save on premium by having a higher deductible.