Homeowners Insurance Deductible: What You Need to Know
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It’s important to carry sufficient homeowners insurance coverage to financially protect your house and personal property against disaster. But before you receive that claim check from the insurance company, you’ll need to pay a deductible.
Here’s what you need to know about homeowners insurance deductibles:
What is a homeowners insurance deductible?
A homeowners insurance deductible is the amount of money you must pay before your insurance company covers a claim.
The deductible might be the only out-of-pocket expense you pay for a covered claim. However, a lower deductible usually results in higher home insurance premiums as the insurer assumes more financial risk.
How do homeowners insurance deductibles work?
You only pay a homeowners insurance deductible when you file a claim. This expense is separate from your premium, which you pay every year regardless of whether or not you file a claim.
Once you pay your deductible, the insurance company will send you a claim check for the cost of the damage minus your deductible.
Certain coverages may not require a deductible. Personal liability coverage and medical payments coverage, for instance, usually don’t have a deductible. Loss of use claims that require drawing additional living expenses benefits may not require you to pay a deductible either, depending on your insurance company and policy.
Similar to auto insurance, your deductible applies to each eligible claim. So, if you file multiple claims in one year, you must pay the full deductible amount each time before your policy benefits kick in.
Types of homeowners insurance deductibles
Homeowners insurance deductibles come in two different types:
1. Flat deductible
With a flat deductible, you pay a fixed dollar amount — such as $500 or $1,000 — each time you file a claim. This is the deductible type most people are familiar with, and it applies to most losses.
2. Percentage deductible
A percentage deductible is usually between 1% and 10% of your home’s insured value.
For example, if your home’s insured value is $300,000 and comes with a 1% deductible, you’d have to pay $3,000 out of pocket when filing a claim.
Percentage deductibles are most common in claims related to earthquakes, hurricanes, floods and severe windstorms. They’re often higher than standard, flat deductibles. Your percentage deductible amount can also adjust yearly if your home’s insured value increases.
What is a disaster deductible?
Unfortunately, standard home insurance policies won’t cover every natural disaster or storm risk. As a result, you’ll need to purchase separate insurance for special risks like:
- Windstorms and hail
To cover damage from these events, you’ll pay a special percentage deductible. For example, deductibles for earthquake insurance are usually between 10% and 20% of a home’s insured value. Coverage options for different disasters vary by area.
How does your deductible affect your homeowners insurance premium?
A lower deductible minimizes your out-of-pocket responsibility for covered perils, but it usually results in a higher premium.
If you can afford more out-of-pocket costs, you might choose a higher deductible — say, $2,000 or more — to secure a lower insurance rate. Increasing your deductibles for additional coverage like hail storms or earthquakes can also lead to a lower premium.
How to choose the right deductible
When choosing a homeowners insurance policy, it’s important that you settle on a deductible you can comfortably afford. As you shop for a homeowners policy, ask yourself these questions:
1. What deductible can I reasonably afford?
Choosing the right deductible is a balancing act. While you don’t want to pay too much for insurance, you also want to limit your out-of-pocket costs if you need to file a claim.
When choosing a deductible, consider your budget and determine how much you can reasonably afford. If you don’t have a large emergency fund to cover unexpected expenses like a home insurance deductible, you may opt for a lower deductible amount until you can build that emergency fund up.
2. What type of deductible do I have to pay?
Confirm whether the policy requires you to pay a flat deductible or percentage deductible. Your standard homeowners policy will likely have a flat deductible. But, depending on where you’re located, you may have to purchase additional insurance with percentage deductibles to protect against other perils. Your insurance quotes should describe which perils your standard policy covers.
3. What is my risk tolerance?
Determine how much financial risk you’re willing to take on. A smaller deductible can provide more peace of mind since you won’t have to pay much out of pocket to activate your coverage. Higher deductibles, on the other hand, may save you money in the long-term.
Frequently asked questions about deductibles
What is the best deductible for homeowners insurance?
There isn’t a correct answer as there are many factors to consider when choosing a deductible, including your personal finances, risk tolerance, and location. Simply put, the best home insurance deductible is one that you can reasonably afford. Most home insurance companies offer a minimum $500 or $1,000 deductible.
What does it mean to have a $1,000 deductible?
A $1,000 deductible means you pay for the first $1,000 in repairs and your insurance company covers the remaining expenses, up to your coverage limit.
You’ll receive a claim check for your covered expenses minus the deductible amount. For example, if you incur $3,000 in costs and pay a $1,000 deductible, your insurance company will pay out $2,000.
Is it better to have a high or low home insurance deductible?
A low homeowners insurance deductible may be easy to afford and provide more peace of mind, but it also requires paying a higher premium.
Choosing a high deductible is better if you’d prefer to have cheaper premiums and can afford the higher out-of-pocket expenses if disaster strikes.