Understanding Your Homeowners Insurance Deductible

How Does My Deductible Work?

When buying home insurance, it is imperative to understand exactly how the deductible applies to the policy and to which section and coverage on the policy it will apply to. Without this understanding, a consumer cannot make a sound decision about buying home insurance.

The deductible is simply a dollar amount or a percentage which is deducted from a payout following the adjustment of an insurance claim.   Deductibles are an important part of insurance contracts; the deductible is the opportunity for a homeowner to share risk with the insurance company and therefore present less risk to the insurance carrier.

There is sometimes a misunderstanding regarding percentage based deductibles; some people believe that a percentage is a variable amount,  in fact, the percentage is a fixed amount calculated as the percentage of the coverage limit.

In some States, policies may have a dollar based deductible (i.e. $2,500 or $5,000); however, the policy may have a separate deductible for Wind and Hail classified losses (i.e. 1%, 2% etc..).   In the case of a Hurricane, Tornado or Wind Storm,  the Wind and Hail deductible would apply;  if the home is insured for $500,000 and the deductible is listed as 1%, the amount deducted from a covered loss would be $5,000.

Homeowners Insurance policies are generally divided into two Sections,  Physical Loss and Liability Loss.  It is important to understand that the deductible does not apply to Liability Claims in most Homeowners Insurance policies;  this may be verified on the specific declarations page which will state the deductible and state which section it applies to.

An Important View on Deductibles

Since the purpose of property insurance is to provide protection from the burden of financial loss in the event of a claim, consumers agree to pay a small premium in return for the transfer of risk to an insurance company.   We will always have a deductible and the higher the deductible, the lower the premium.

Since we also understand that most policies do not have a deductible applicable to the Liability Section of the policy, we are therefore choosing a deductible for the Physical Loss Section of the policy.  It is also arguable that many homeowners are cautious to report a claim below a variable threshold in an effort not to have the claim reported to the Central Claims Reporting Agency since reported claims may have a negative underwriting effect on future insurance transactions.

Depending on the insurance company, it is possible that rates may be discounted as much as 50% when raising the deductible from $1,000 to $5,000, or perhaps as much as 25% when raising the deductible from $2,500 to $5,000.

If a homeowner has great confidence about the upkeep and maintenance of his/her home and equally feels confident that a homeowners insurance claim is highly unlikely, it may be prudent to select the highest acceptable deductible to generate the lowest insurance premium.

On one last note, it is recommended to multiply the premium rate by 10 in order to make a decision based on the possibility of a loss over 10 years rather than calculating the possibility over the term of only 1 year.   When looking at the decision on a 10 year span, it becomes very evident that the consumer will ultimately be paying more for the lower deductible than the difference in deductible.

When in doubt, a homeowner should contact a licensed representative capable of explaining the options and assisting in the selection of the most appropriate product to the customer.