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If you want to know everything about homeowners’ insurance deductibles, you’ve reached the right spot! This article will tell you how they work, and how to choose the right deductible that can save you money.
A homeowner’s insurance deductible is the amount of money you agree to pay out of pocket for an insurance claim. Thereafter, your insurance company will pay for the remainder of the loss.
Simply put, you pay a deductible before you can make a claim with your insurance provider. Needless to say, your homeowners’ insurance deductible affects the cost of your homeowner’s insurance and its coverage. Therefore, choosing the right deductible is important for getting a homeowners insurance policy that gives you the most value.
The deductible is one of the most important parts of any insurance contract. Your deductible not only affects the amount which will be subtracted from future claims, but it also has a very significant impact on the cost of the policy. As such, the deductible is rightly one of the first elements that most people consider when shopping for homeowners or renters insurance coverage.
Read more: Ultimate Guide to Homeowners Insurance
How does homeowners insurance deductible work?
If you’re asking yourself how do insurance deductibles work you’re not alone. Especially for first-time insurance buyers, this question is a common one.
A deductible is what you, as an insurance holder, are responsible for putting toward a claimed loss. Let’s say you were renting a house and it was damaged in a fire. You are insured up to $20,000 of personal property losses, but you only need to claim $10,000. The deductible on your renter’s insurance policy is $500. As such, you are responsible for paying that $500 out of your pocket for any replacements or repairs before your insurance policy kicks in to cover you for the additional $9,500. The deductible amount, the $500 in this case, is “deducted,” or subtracted, from the full claim amount.
Remember that fewer insurance claims mean a higher deductible. That’s because, every time you make homeowners claim — your premiums will go up. That’s why you probably wouldn’t want to file a claim for low-cost losses.
Types of homeowners insurance deductibles
Basically, there are three types of home insurance deductibles.
- Specific dollar amount deductible – It’s the most common form of the insurance deductible. You pay a specific amount as a deductible before your insurer pays its portion. For example, if you have a small kitchen fire, causing you damage worth $3,000, you will pay $1,000 if that’s your deductible amount. Your homeowner’s insurance company will pay the remaining $2,000.
- Percentage deductible – Your deductible will be a percentage of your policy’s total coverage, which is of the total insurance policy value. This model is mostly only common in homeowners’ insurance policies. So, if your home is insured for $300,000 and you have a three percent deductible, then you would need to pay $9,000 out of pocket on any claim. In other words, if your house caught fire and you ended up making a $75,000 claim on your insurance policy, your claim check would be $66,000 rather than the full $75,000.
- Split deductible – This is a mix of the above two depending on the situation. For instance, while a fixed dollar amount may apply to most claims, a percentage may be applied to certain natural events, including a hurricane or an earthquake.
Why do we pay homeowners insurance deductible?
Insurance companies put deductibles into their policies as a way of sharing the risk of an incident with you, the insured. Most first-time insurance buyers believe that their monthly premiums already represent a “sharing of risk” with the insurance company. So, why should they be expected to pay a deductible if they’re already paying a monthly premium?
The simple answer is that every insurance buyer gets to decide whether they’d rather shoulder more risk: with the monthly payment or with the deductible.
If you take on more risk with the monthly payment, you will be paying a higher insurance premium rate. In exchange, you get a lower deductible. You are investing more on a month-to-month basis to make sure that you won’t have to pay a big out-of-pocket lump sum if something happens and you must make an insurance claim.
Alternatively, you can opt for a lower premium rate, with the knowledge that you will have to pay a higher deductible if you claim on the policy.
Interestingly, raising your deductible can reduce your homeowner insurance payments by almost 20% to 40% — of course, it may vary by state and depends on your insurance coverage.
Read more: High-risk homes: What drives up insurance
What is the best deductible for homeowners’ insurance?
The best homeowners insurance deductible for you depends on your financial situation. Ideally, you should opt for the highest deductible you can afford comfortably. Generally, it’s a good idea to choose a homeowner’s insurance deductible of at least $1,000. Keep in mind that having a higher homeowner’s insurance deductible will reduce your premiums — often by a good amount.
A high deductible plan is suitable for a person who’s healthy — with no immediate medical needs or medical expenses and can afford to have a delayed cover.
If you live in a new building with an alarm system, good plumbing, and feel confident about how you handle your belongings, then shouldering a higher deductible might be preferable to paying high monthly premiums on coverage.
On the other hand, if you live in a disaster-prone area where hurricanes and summer fires are a reality, then choosing a minimum deductible is a reasonable choice. Of course, you should always assess your financial situation before taking on a higher deductible.
Is homeowners insurance tax-deductible?
Generally speaking, homeowner’s insurance is NOT tax-deductible. So also its premiums, even though they may be a part of your mortgage payments. The Internal Revenue Service (IRS) does not consider homeowner’s insurance as a nondeductible expense.
This means that you cannot itemize any payments for your home insurance— even if it’s for events such as a fire, theft, or comprehensive coverage. So, you cannot include insurance on your tax return.
How to setup deductibles on homeowner & renters insurance
There is no hard and fast rule about the “right” way to set up your insurance deductible. Ultimately, the decision will vary from one person to the next. Factors that may affect your decision include how much money you’ve saved, your likelihood of making a claim, and your aversion to risk.
For example, if you live in an area prone to hurricanes, you should consider yourself in a higher-risk environment. If there are a lot of car burglaries in your neighborhood and you tend to forget your laptop in your car – renters insurance actually covers that!
There are numerous situations where it might make sense to increase your deductible and enjoy those monthly and yearly savings on premiums. However, it’s easy to think of paying $2,500 out of pocket when risk is an abstract possibility. It’s a lot harder when something actually happens, and you must write a check for that amount.
Shooting for lower deductibles on renters insurance when you don’t live in a secure, stable environment is risky since you never know when you will need that coverage. When in doubt, chat with your insurance agent or broker. That way, you can get a better sense of how much you will save, both monthly and annually
Read more: Is it a good idea to bundle insurance?
Last thoughts on homeowners insurance deductible
When shopping for homeowners insurance, of course, insurance premiums are important. But, it’s equally important to understand and choose the right deductible. If you choose well, you can get the most out of your homeowner’s insurance policy.
Here are some key takeaways regarding homeowners insurance deductible:
- In the case of a loss or damage, you pay a deductible out of your pocket for an insurance claim, after which your insurance company pays for the remaining amount.
- A higher deductible usually means lower insurance premiums vice-versa.
- The type of deductibles for you will depend on the kind of situation. Most losses have the standard dollar amount, a loss due to a natural calamity might warrant a percentage deductible (typically 1% to 5%).