How do deductibles work?
A home insurance deductible is the amount of money that the insured party is willing to pay out of pocket towards an insured loss. When a disaster which you are insured against strikes your home, the amount of your deductible is deducted from the total claim payment.
A deductible is the way in which the policyholder and insurance company share risk. In general, the higher the deductible amount, the lower the insurance premiums and vice versa. When it comes to home insurance policies, your bottom line is always the vital factor that determines your deductible amount, ie, the amount of out of p0cket expenses that you can afford if you need to file a claim.
How deductibles work
You have to pay your deductible amount each time you file a claim. There are two types of home insurance deductibles:
1. Dollar amount deductibles
This refers to a fixed dollar amount that the policyholder pays out of pocket when filing a claim if a covered loss happens. There are usually three options when choosing dollar amount deductibles; $500, $1,000, and $1,500. The $1,000 is by far the most popular.
If, for example, you have a $1,500 deductible amount and you file a claim after a tree branch fell on your roof requiring $7,500 to repair the damage, you will cover the first $1,500 while the insurance company covers the remaining $6,000. If the damage in this scenario costs $1,300 to repair, you will pay for all repairs.
2. Percentage deductibles
A percentage deductible is calculated based on a certain percentage of the house's insured value. If, for example, if your home is insured for $100,0O0 and you have a 1% deductible, $1,000 is the total amount which should be deducted from all your claim payments.
Choosing the perfect deductible
There are two main things that you need to think about when choosing your deductible. First, look at how it affects the premiums. As mentioned earlier, the higher the deductible, the lower the premiums. But don't go choosing the highest amount possible. You must think about the second factor; how much are you willing and able to pay yourself in the event that a loss happens?
Limiting the out of pocket costs should be the only reason for choosing lower deductible amounts.
Disasters like wind/hail, hurricanes, earthquakes, and floods have their own unique deductible rules:
a) Hurricane deductibles - special deductibles apply for home insurance claims when the damage is caused by hurricanes, particularly in hurricane-prone states. Whether the hurricane deductible applies or not depends on the trigger chosen by the insurance company. Hurricane deductibles are usually higher than other home insurance deductibles and can be mandatory in high-risk coastal areas.
b) wind/hail deductibles - these are similar to hurricane deductibles but are common in areas that experience severe wind storms or hail.
c) Flood insurance deductibles - these vary by insurer and state and can be in percentage or dollar amounts.
d) Earthquake insurance deductibles - these range from 2-20% of the replacement value of the home. States with higher than average earthquake risk, such as Washington, usually set minimum earthquake insurance deductibles at around 10%.