Homeowner Insurance Deductibles: How Do They Work?
Home insurance covers losses or damages to your primary residence.
It protects against different types of perils such as theft, fire, storm, vandalism, and water damage from broken pipes.
It’s a financial protection, and without a policy, you would have to pay these home repairs out-of-pocket.
You can pay home insurance as one annual premium or monthly. But while keeping your premium up-to-date insures coverage, home insurance policies don’t provide 100 percent coverage.
You’ll pay some of your own money, too, in the form of an insurance deductible.
Here’s what you need to know about home insurance deductibles, including how they affect your premium, and what you’ll pay when filing a claim.
What is a Home Insurance Deductible?
Deductibles are common with home insurance policies, as well as other types of policies.
The deductible is what you’ll pay out-of-pocket before your insurance provider pays a claim.
You are responsible for the deductible each time you file a claim, whether it’s a claim for fire, theft, or a windstorm.
Homeowners insurance deductibles are quite different from health insurance deductibles, which cap the amount you pay out-of-pocket in a given year.
There’s no maximum out-of-pocket with home insurance deductibles.
So if you file three claims within a year, you’ll pay three separate deductibles in that year. The only exception is with regard to hurricane deductibles.
Typically, insurance companies only charge one hurricane deductible per year, regardless of how many times a hurricane damages your property.
Regarding deductibles, your insurance company will subtract this amount from your insurance payout.
The good news:
You’re only responsible for a deductible when you use your insurance. So if you never file a claim, you’ll never pay the deductible.
Keep in mind, too, that you don’t have to file a claim to fix your home.
In some scenarios, the cost of a repair is less than the cost of the insurance deductible. In this case, you can find a contractor and complete repairs without going through your insurance company.
Impact on the Cost of Home Insurance
Deductibles don’t only impact how much you pay when filing a claim. They also impact your insurance premium.
Understandably, some people choose a policy with the lowest deductible.
This way, they’ll pay the least amount of money out-of-pocket. But while this makes sense from a financial standpoint, paying a low deductible often results in higher insurance premiums.
On the other hand:
If you choose a higher deductible, you’ll pay less for home insurance.
Different Types of Deductibles
When shopping for home insurance, it’s important to understand how your policy works.
You should understand your coverage details, as well as the different types of deductibles. This alleviates surprises when you file a claim.
Here’s a look at the different types of home insurance deductibles:
1. Standard home insurance deductible
Your home insurance policy will include a standard deductible. This is a flat fee or fixed dollar amount that you’ll pay out-of-pocket for certain types of damage.
Standard deductibles can start as low as $500. Yet, climb as high as $2,000 or $2,500 per claim.
Insurance companies apply standard deductibles to certain types of damages or losses. These include:
- water damage from pipes or appliances
- certain wind storms
- damage by car or aircraft
If you have a $500 deductible and it costs $10,000 to repair your home, you’ll pay $500 out-of-pocket and your insurance company pays $9,500.
2. Percentage home insurance deductible
Be mindful that home insurance policies often include a percentage deductible, too.
These deductibles often apply to named windstorms such as hurricanes and tropical storms. In which case, a fixed dollar amount doesn’t apply.
Instead, your deductible is a percentage of your home’s insured value.
Let’s say a hurricane damages your home and your property is worth $300,000. A 2 percent windstorm deductible means you’ll pay $6,000 of your own money.
Percentage deductibles can also apply to hailstorms and tornadoes, but this depends on the insurance company. Some companies charge a flat fee deductible for tornado and hailstorm damage.
This is why it’s important to review your policy and understand your out-of-pocket responsibility before a disaster happens.
As a side note, also confirm that your policy includes windstorm protection.
If you live in an area prone to hurricanes, some insurance providers might exclude windstorm protection from your standard policy. In which case you’ll have to purchase umbrella coverage. This type of coverage typically has a percentage deductible, too.
3. Other deductibles
Unfortunately, a standard home insurance policy doesn’t cover every type of damage.
For example, standard policies don’t cover earthquakes, mudslides, sinkholes, or floods.
To protect your property, you’ll need to get an umbrella policy that covers earth movements (if you live in an area prone to sinkholes and earthquakes). And if you live in a high-risk flood area, you can also purchase flood insurance through the National Flood Insurance Program (NFIP).
You can also get a policy through your existing insurance company.
Umbrella policies also have deductibles, which can vary from policy to policy. With flood insurance, you can expect a minimum deductible of $1,000. Although these deductibles can be as high as $10,000.
Deductibles for earthquake insurance can range from 5 percent to 25 percent of your dwelling coverage. Dwelling coverage is the part of your home insurance policy that protects the physical structure of your home.
You need enough dwelling coverage to completely rebuild your home after a major disaster.
How to Choose a Home Insurance Deductible
You can select your deductible amount when purchasing a home insurance policy.
Your agent will provide multiple options, and you’ll choose the one that best fits your circumstances.
While you might be tempted to select the cheapest option, here are a few things to keep in mind when choosing your deductible.
How much do you have in savings?
Consider how much you have in cash reserves before getting a home insurance policy.
Since you’re required to pay your deductible when filing a claim, you’ll need this amount in your emergency fund.
If you choose a home insurance policy with a $2,000 deductible, and you don’t have this amount of cash in reserves, you’ll run into hardship when filing a claim.
A higher deductible only makes sense when you have a sizable amount in savings. If you have a smaller reserve, choose a cheaper deductible to avoid straining your finances when filing a claim.
What’s your claims history?
When you apply for home insurance, your insurance agent will check your claims history.
The reality is:
Filing a previous home insurance claim within the past three years can result in a higher insurance premium.
In this case, choosing a plan with a higher deductible can help offset the higher premium.
But again, only choose a higher deductible if you have enough cash in reserves.
Tips to Help You Save Money on Home Insurance
Choosing a higher deductible isn’t the only way to save on home insurance premiums—you can take other steps, too. For example:
1. Shop around
Whether you’re buying home insurance, life insurance, or health insurance, always shop around and compare policies before signing up.
Insurance premiums can vary from provider to provider.
Comparison shopping offers a simple way to compare premiums, coverage, and terms.
2. Bundle your policies
You can also save by continuing an existing relationship with an insurance provider.
In other words, if you have auto insurance or life insurance, see if your provider also offers home insurance.
If so, they might reward your loyalty and give you a multi-policy discount.
3. Increase your credit
Unknown to some, insurance providers often check an applicant’s credit history before issuing a policy.
Having a high credit score can help you get a lower premium.
So take steps to improve and maintain your credit history.
Pay your bills on time, pay off credit card debt, and periodically review your credit report for inaccuracies.
4. Make your home safer
You can also save by making your home safer.
For example, your insurance provider might offer a discount if you have a smoke alarm, a burglar alarm, deadbolt locks, or if you make your property more storm-resistant.
This includes installing shatterproof windows or using better roofing materials.
Home insurance offers a lot of protections, and it can significantly reduce your out-of-pocket expense.
You are, however, responsible for paying a deductible.
This is either a standard fixed amount, or a percentage of your home’s insured value.
For this reason, it’s important to understand how your coverage works, and then choose a deductible you can afford.