Understanding Your Home Insurance Deductible
If you have a mortgage, chances are your lender requires homeowners insurance. It’s something that can help protect your investment and provide some much-needed financial relief if your property sustains costly damage during a covered event. Just like health insurance or auto insurance, you’ll have to pay a premium — but that only makes up one part of your total costs.
Your home insurance deductible is the other side of the coin, and it can have a real impact on your financial health. Let’s take a deep dive into how your homeowners insurance deductible works. Understanding it can help protect your home while saving you money in both the short and long term.
What is a Home Insurance Deductible?
Your home insurance deductible is different from your premium, which is the amount you pay to remain insured. This is typically paid out on a monthly or annual basis, depending on the policy, and essentially keeps your policy active. You may be able to pay your insurance premiums to your lender as part of your monthly mortgage payments using an escrow account. From there, the lender will pay the insurance company on your behalf. In other instances, you might have the option of paying your premium yourself directly to the insurer.
Your home insurance deductible, on the other hand, is a separate expense. It refers to the amount you’ll have to pay out of pocket before your insurance policy kicks in their share. It typically resets on a per-claim basis, meaning that you’ll have to meet your deductible every time you file a new claim. However, there are some exceptions to the rule. During Florida hurricane season, for example, insurers apply one deductible that’s good for the whole season.
How Does a Home Insurance Deductible Work?
Let’s say you have a $1,000 home insurance deductible and you experience a fire that causes $3,000 worth of damage to your home. You’d file a claim with your insurance company, after which they’d factor in your deductible and then cut you a check for $2,000. You, the homeowner, are responsible for coordinating repairs and paying for these services directly. The good news is that many big insurance carriers have relationships with preferred vendors and contractors who can help coordinate repairs, which can make things a little easier.
An important thing to keep in mind is that you’ll only file a claim for damages that are equal to or above your deductible. If you experience a covered event that causes, say, $2,000 worth of damage and your deductible is $2,500, your insurance company won’t cover any of it. Instead, you’ll have to pay for all the necessary repairs yourself. In this way, having a lower deductible can come in handy.
Types of Home Insurance Deductibles
Your home insurance deductible can be structured in different ways, depending on the type of claim you file. The bulk of claims will result in a predetermined dollar amount that’s laid out in your policy. Most insurers set the minimum at $500 or $1,000, according to the Insurance Information Institute, though it could certainly be higher. The upside is that you have the power to choose your deductible and can opt for a lower amount. The one caveat is that doing so can affect your premium. (More on this shortly.)
In some cases, your deductible may be calculated as a percentage of the total amount of insurance you have, rather than a flat dollar amount. This is generally the case for damages related to hurricanes, wind, or hail. The same goes for flooding and earthquakes, though it’s important to highlight that these two events are not typically covered by standard homeowners insurance policies. You’ll likely have to purchase additional coverage for these.
Let’s say your home is insured for $200,000 and your policy has a 2% deductible for wind damage. If you file a claim, you’ll be on the hook for $4,000.
Another important detail to mention is that home insurance deductibles usually only apply to property damage. It may be a different story when talking about liability. For instance, if someone is injured on your property and files a medical claim, deductibles generally won’t apply.
How Your Home Insurance Deductible Affects Your Premium
Your home insurance deductible can play an important role in your premium — a higher deductible often translates to lower premiums (and vice versa). It’s all about financial risk for the insurer. If you have a lower deductible, they’ll have to pay out more if you file a claim. They’ll likely increase your premium to mitigate this risk.
Choosing the Right Home Insurance Deductible for You
Going with a higher deductible can free up more breathing room in your monthly budget. This can be a positive thing if finances are tight, but it does come at a cost. If your home sustains costly damages, you’ll have to shell out the amount of your deductible before your policy kicks in. This could throw a major wrench in your financial health if you aren’t ready for it.
For this reason, it’s always wise to have enough cash on hand in your emergency fund to cover your deductible if you had to. If you don’t, you may be better off with a lower deductible that requires you to pay a little more for coverage.
Of course, there’s more to consider than just your premium and deductible when shopping around for a home insurance policy. You also need to consider your coverage limit for the structure of your home, along with liability coverage and personal property protection that feels adequate for your unique needs.
It goes without saying that finding the right homeowners insurance policy can feel overwhelming. Matic makes it easy, allowing you to get a personalized quote in a matter of seconds so that you can begin saving sooner rather than later.