The whole point of having a home insurance policy is to give you peace of mind knowing that you’ll receive financial help in the event of damage to your home or its contents. Losses that result in thousands of dollars in damages can leave you with a big financial hole to fill.
With the help of a home insurance policy, an approved claim will provide you with the financial compensation you need. Before your policy kicks in, however, you will first need to pay a deductible.
What Is A Home Insurance Deductible?
The deductible is a separate cost from the monthly or annual premiums you pay. Your premiums must be paid on time and in full in order to keep your policy active and ensure that you receive compensation when required. Your deductible is a lump sum of money that you agree to pay to your insurance provider before a claim is approved and a payout is made.
How Deductibles Affect Your Home Insurance
Your deductible affects the cost of your home insurance policy and the coverage that comes with it. Generally speaking, a more expensive deductible translates into lower premiums. A lower deductible, on the other hand, translates into higher premiums.
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The good news is that you can choose the deductible amount associated with your policy. For instance, you can choose between a $500 or $2,000 deductible, and the one you select will have a direct influence on your premiums.
Types Of Home Insurance Deductibles
Deductibles on home insurance policies come in the following forms:
The standard deductible on a homeowner’s insurance policy refers to a fixed amount that you choose when you first take your policy out. These deductibles usually range from anywhere between $500 to $2,000, though you may have lower or higher deductible options available to you.
The standard deductible amount would be deducted from your claim total. If you file a claim for $8,000, for instance, and your deductible amount is $1,000, the insurance company would pay out the remaining $7,000.
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Some insurance policies may set your deductible based on a percentage of your coverage amount. For instance, if your home is insured up to $500,000 and your deductible is set at 1% of that limit, you would pay a deductible of $5,000 when filing a claim. These types of deductibles are more commonly associated with specific perils, such as windstorms and other weather-related issues.
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Other deductibles are required to cover specific perils not covered under a standard policy:
- Flood insurance deductibles – A standard homeowners insurance policy does not cover damage from water as a result of overland flooding outside your home. If you want coverage for flood damage, you will need to take out a specific flood insurance policy, which will come with its own deductible when a claim is filed.
- Sewer insurance deductibles – Sewer backup is also not usually covered by a standard homeowners insurance policy. You would need a specific policy for sewer backup coverage, which would require a deductible to be paid before the insurance company covers the claim amount.
- Earthquake insurance deductibles – If you live in an area that is more prone to earthquakes, you may want to consider taking out an earthquake insurance policy. Deductibles for this type of policy are often percentage-based and can range from 2% to 20% of the replacement value of your home, depending on the risk level in your area.
- Windstorm and hail deductibles – If you have a specific windstorm and hail insurance policy, a deductible will need to be paid before your policy kicks in, which is often percentage-based for this type of coverage.
How To Set Your Deductibles
The deductible you decide to go with should be based on what you can afford to pay on premiums, as well as what you’re comfortable spending to repair or replace damaged property out-of-pocket.
Generally speaking, deductibles of at least $1,000 are best, as higher deductibles reduce your premiums. But that doesn’t mean you should go with an extremely high deductible to pay rock-bottom premiums in hopes that a claim will never need to be filed. Keep in mind that the deductible amount you choose will affect any claims made for less than that amount.
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For instance, if you choose a $10,000 deductible, your premiums will likely be very low. However, you’d be limited to filing a claim to cover damages worth more than $10,000. Otherwise, it wouldn’t be worth filing a claim. So, if $5,000 worth of property was damaged or stolen, it wouldn’t make much sense to pay out a $10,000 deductible. In this case, you’d have to pay for these damages out of your own pocket.
That said, if you’re comfortable covering the cost of damaged or stolen property worth less than $10,000, then choosing a very high deductible to pay much cheaper premiums might be worth it.
At the end of the day, setting your deductible amount will be based on how much you can afford to pay out before your policy kicks in when filing a claim. The more you can afford to pay in the form of a deductible, the more you can save on your monthly premium payments. Higher deductibles equal lower premiums, while lower deductibles mean higher premiums.
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A deductible is part and parcel of a homeowners insurance policy, particularly when it comes time to file a claim. Be sure to assess your financial situation to make sure your premiums fit within your budget and your ability to pay out-of-pocket for damages that amount to less than what your deductible is. In many cases, filing a claim might not be worth it depending on the total in damages relative to your deductible.
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