Homeowners insurance has several important components. Besides the premiums due and coverage limits, the deductible can make or break your budget in a claim situation. Choosing the right deductible amount is important — picking a lower one causes your premiums to increase. But if you choose a higher deductible to lower your monthly insurance bill, you could end up strapped for cash during a claim.
So, what is a deductible for your homeowners insurance policy 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.
How to choose a homeowners insurance deductible
If you are shopping for homeowners insurance, you have most likely already determined what annual premium you can afford. If you have not, consider both the premium and the deductible costs and follow these steps:
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.
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
Although rare, some insurance companies may expect you to pay the deductible up front. Most insurers will deduct the deductible amount from the claims payout you are set to receive. You may want to learn more about how your insurance company expects you to cover the deductible.
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 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.
Frequently asked questions about deductibles
What is the best deductible for homeowners insurance?
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).
What does it mean when you have a $1,000 deductible?
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.
Are home insurance deductibles tax deductible?
Most of the time they are not. 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 more you will pay in premiums. If you can comfortably set money aside in case you need to file a claim, you could save money off your premiums over time by having a higher deductible. While deciding what your deductible should be, check with your mortgage company to make sure they do not have any restrictions on how high your homeowners insurance deductible can be.