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There's a lot to consider when shopping for homeowners insurance. In addition to coverage and premiums, be sure to factor the deductible into the equation. An insurance deductible is the amount you're responsible for paying after your insurance claim is approved. Adjusting your deductible can affect the cost of homeowners insurance, but it's important to ensure that both your premiums and your deductible are manageable.
What Is a Home Insurance Deductible?
When an insurance claim is approved, your deductible is subtracted from the payout you receive. Homeowners insurance may have a flat dollar amount deductible (such as $500 or $1,000) or a percentage deductible, which is a percentage of your property's insured value. For example, if your home is insured for $200,000 and your policy has a 2% deductible, $4,000 (2% of $200,000) would be deducted from any payout.
Your home insurance policy may have separate deductibles for hurricane or wind and hail coverage. Any additional policies, such as earthquake insurance or flood insurance, typically have their own deductibles too.
Standard home insurance covers your dwelling (the home's physical structure), personal property, additional living expenses if your home is uninhabitable during repairs and liability if someone is injured on your property. Homeowners insurance deductibles typically apply to claims involving your dwelling or property, but not to claims involving liability, medical payments or additional living expenses.
How Does a Homeowners Insurance Deductible Work?
Your homeowners insurance deductibles can affect your payout, your premiums and even your decision to file a claim. Here's how it works.
How Does a Home Insurance Deductible Affect Your Payout?
When you file a home insurance claim, the deductible is subtracted from any payout you receive. Suppose you have an insured loss that will cost $5,000 to repair and your policy has a $500 deductible. Your insurance company would pay out $4,500 toward repairs ($5,000 minus the deductible). Since repairs will cost significantly more than your deductible, it's probably worth filing a claim.
On the other hand, suppose you have an insured loss of $5,000, but your home insurance policy has a 2% deductible and $200,000 in coverage. The insurer would pay out $1,000 ($5,000 minus the $4,000 deductible); you'd be responsible for the remaining $4,000 of damage. In this situation, it may not be worth filing a claim, because doing so could cause your premiums to rise.
When Do You Pay the Deductible for Homeowners Insurance?
You don't actually "pay" the deductible for homeowners insurance before receiving a settlement. Instead, the deductible is subtracted from your payout. However, you are responsible for the cost of repairing damages or replacing property that the insurance settlement doesn't cover.
A home insurance deductible applies whenever you file a claim. If you file three claims in one year, you'll have to pay a deductible each time. There are some exceptions, so check your coverage. For example, in Florida, homeowners only have to pay one hurricane deductible per calendar year, even if they file multiple hurricane-related claims that year.
How Does a Home Insurance Deductible Affect Your Premiums?
In general, a lower homeowners insurance deductible means higher premiums, and a higher deductible means lower premiums. Although most homeowners insurance policies have a minimum deductible amount, you usually have some flexibility to choose your deductible.
Raising your deductible can save money, but you'll receive a smaller settlement in the event of a claim. If your deductible is too high, you might struggle to cover the costs of a loss.
Conversely, a policy with a lower deductible will deliver a bigger payout if you have a claim. However, your premiums will be higher, leaving less in your budget to put toward savings or other expenses.
What Is a Disaster Deductible?
Homeowners insurance usually has separate deductibles that apply to damage caused by wind and hail, floods, earthquakes or hurricanes. If your area is prone to such natural disasters, be sure you understand any deductibles associated with your coverage.
Hurricane Deductibles
Hurricanes are covered by standard home insurance policies. However, hurricane damage may be subject to special deductibles that are usually higher than standard deductibles. Hurricane deductibles are typically percentage-based and range from 1% to 10% of a home's insured value. In some states, you can get a traditional dollar deductible by paying higher premiums.
Each state and insurance carrier has its own rules as to what triggers a hurricane deductible, but it generally requires the National Weather Service to give the storm a name, issue a hurricane watch or hurricane warning, or categorize the hurricane's risk based on wind speed.
Wind and Hail Deductibles
Standard homeowners insurance covers damage from wind and hail, but in regions prone to windstorms or tornadoes, there may be a separate wind and hail deductible. Like hurricane deductibles, wind and hail deductibles are usually percentage-based, ranging from 1% to 5% of the home's insured value.
Flood Deductibles
Deductibles for flood insurance vary depending on your location and insurance carrier and may be offered in dollar amounts or percentages. There is generally one flood deductible for your personal property and another deductible for your dwelling. If your home is mortgaged, your mortgage lender may require the flood deductible to be under a specific amount so you can afford to pay it.
Earthquake Deductibles
Deductibles for earthquake insurance are percentage-based and may range from 2% to 25% of your home's replacement value, depending on earthquake risk where you live. States may set minimum deductibles depending on your home's age, insured value and other factors. For example, the minimum deductible for policies sold by the California Earthquake Authority is 5%; however, that rises to 15% for homes that are insured for over $1 million or were built before 1980 that don't meet earthquake safety standards. Dwelling and personal property coverage may have separate earthquake deductibles.
How to Choose the Right Homeowners Insurance Deductible
When choosing your homeowners insurance deductible, here are some factors to consider.
- Can you afford a high deductible? A higher deductible can lower your insurance premiums but could cost you thousands of dollars out of pocket if you file a claim. If you don't have sufficient emergency savings or your credit limit won't cover a high deductible, opting for a lower deductible may make more financial sense.
- Can you afford the insurance premiums? Homeowners insurance is an important safeguard against catastrophic loss. If raising your deductible is the only way to make insurance premiums affordable, that may be your best option.
- How likely are you to file a claim? Since filing home insurance claims too often can cause your rates to rise, it's best to limit claims to major damage you couldn't afford to pay yourself. If you can cover relatively minor damages out of pocket, choosing a higher deductible and lower premiums could leave extra cash in your budget to save for future home repairs.
- Are you in a high-risk area? Going without homeowners insurance is always risky, but especially so in a region prone to natural disasters. In this case, you may need to choose whatever deductible option brings premiums within your price range.
Review your budget to see how much you can afford to pay for insurance. Also consider your savings and other financial options for paying a deductible, such as credit cards or personal loans. Visit insurance company websites or online insurance marketplaces, or talk to an insurance agent to compare home insurance policies and see how adjusting deductibles might affect your premiums. Also look for other ways to save on insurance, such as discounts for membership groups, for paying online or for bundling home and auto coverage.
The Bottom Line
Understanding how insurance deductibles work will help you make an informed decision when shopping for home insurance. Raising your deductible isn't the only way to save on home insurance—a good credit score may help too. In many states, insurance carriers check your credit-based insurance score, which differs from your regular credit score but is based on many of the same factors.
Checking your credit score before you apply for homeowners insurance will give you a good idea of what insurers may see. Paying bills on time, paying down debt and avoiding new applications for credit could help boost your credit score—and lower your insurance premiums.