How Does Home Insurance Deductible Work? [2020 Updated]

Understanding How Does Home Insurance Deductible Works

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In the world of insurance, your home insurance deductible is the amount of money you will be liable to pay before you can make a claim. Your deductible affects the cost of your homeowners insurance coverage, so choosing the right deductible is a significant factor in getting the most out of your insurance policy.

To get a homeowners insurance policy with the most value, you should be able to answer- how does home insurance work? Fortunately, we answer that question below and we explain how your deductible affects your insurance policy’s affordability.

Want the right answer to how does home insurance deductible work? In this article, you will learn what a home insurance deductible is, why you need a home insurance deductible, how your deductible affects your rates, and how to choose the best deductible for your circumstance. Read on!

What Exactly is a Home Insurance Deductible?

What is a deductible in home insurance? From the explanation of an insurance deductible above, it is easy to understand what a home insurance deductible is. It is the amount you, as a homeowner, will have to pay out of pocket for the damages to your property before the insurance company pays for the rest of the loss. 

How Does a Deductible Work?

Let us look at an example. A fire outbreak occurs and causes $10,000 worth of damage. If you have a $1,500 deductible, you will first have to pay $1,500 out-of-pocket, then your insurance company will cover the $8,500 excess above your deductible amount. 

However, if your home suffers $1,500 or lower in damage, you should not even file a claim. You will have to cover everything.

If you file a claim that consists of two or more property coverage aspects, you will only pay one deductible. For example, if a house fire damages your home structure and personal property, you can report the structural damage first and later on personal property loss. But, you will only be required to pay the deductible once. 

Most property claims such as theft, fire, etc. have the same home insurance deductible amount, but other types of home insurance claims, like guest medical, seldom come with deductibles involved.

You have some control when it comes to choosing the deductible amount. Homeowners insurance companies offer their deductibles in different ways. For example, your insurer might ask you to choose from deductibles of $500, $1,000, or $2,500. Choosing a higher deductible will lower your insurance premiums.

On the other hand, some companies may set the deductible as a percentage of your insurance policy’s coverage levels. For instance, if your home is insured up to $200,000 and your deductible is equal to 2% of your coverage limit. Rather than paying a fixed dollar amount when you file a claim, you would pay $4,000.

Why Do Home Insurance Policies Have Deductibles

Apart from helping home insurance companies share costs with policyholders after they file a claim, home insurance deductibles also allow insurance companies to get a measure of financial stability and minimize moral dangers. 

  • Ensure Financial Stability

Insurance policies use deductibles to provide a measure of financial stability for the insurance company. It provides padding between any given minor loss and a severe loss.

If insurance policies had no deductibles, all minor claims would be the insurance company’s responsibility no matter the cost. The company’s number of insurance claims and financial costs would become overwhelming, preventing them from responding appropriately to actual disastrous losses.

  • Moral Dangers

Another thing deductibles help the insurance company with is to minimize the risk of moral dangers/hazards. This is the risk that the policy owner will not act right by the insurer. The policyholder might embark on risky behaviour and not have to suffer any financial result. 

Therefore, the deductible lessens that risk because the policyholder is also responsible for the costs.

What are the Types of Home Insurance Deductibles? 

There are three major types of home insurance deductibles:

1. Percentage-Based Home Insurance Deductible

Percentage based deductibles are particular to storm and hurricane-related claims. They are calculated based on a percentage ranging from 1% to 10% of your total coverage amount.  

For example, if your home is insured for $300,000, and your insurance policy has a 1% deductible, $3,000 would be deducted from the claim payment. It means you will have to pay the first $3,000 of any claim. Let’s assume the damage is worth $20,000. Your reimbursement would be $17,000 after you pay the deductible.

When Should You Opt for a Percentage-Based Home Insurance Deductible?

Choosing a percentage-based deductible has its benefits in some situations. If you own an expensive home, you can easily pay out of pocket for minor repairs. Going for a percentage-based deductible could help you save money on your insurance premiums. How?

Let’s assume your home is insured for $2 million, and you took on a 1% deductible of $20,000. It means you’d take on a more generous cut of your policy’s risk than if you had gone for a $2,500 flat-rate deductible. Doing this would lower your premiums.

You can also benefit from choosing a percentage-based deductible if you want to increase your deductible incrementally. For instance, you own a $200,000 home and have a $1,000 deductible. You know choosing a higher deductible will reduce your premiums, but you don’t want to go for a deductible of $2,500, which would likely be the insurer’s next offer.

A 1% deductible would increase your pay from $1,000 to $2,500 instead of $2,000, giving you a more manageable increase that would also reduce your premiums!

2. A Standard Dollar Amount

 It is also called a standard deductible. It is the standard, specific dollar amount you are responsible for paying before your insurer pays its part.  A standard home insurance deductible is usually between $500 to $2,000. However, there are lower and higher deductibles.

This is how they work: if your deductible is $1,000 and you file a fence claim totalling $5000 in damages, you will pay the first $1,000 of the repair costs out of your pocket before your insurer sends you a cheque for the remaining $4,000.

3. Split deductible

This split deductible is like a hybrid of the first two types.

What are Homeowners Disaster Deductibles?

Your standard homeowners insurance covers wind, hail, and hurricanes while you’ll have to buy flood and earthquake insurance policies separately. However, each of them has its own deductible rules if a disaster occurs involving them:

  • Named Storm & Hurricane Deductibles. 

In hurricane-prone regions, special hurricane deductibles may be adhered to when homeowners make property damage claims attributed to a hurricane or a named storm.

To confirm that a hurricane deductible applies to a claim, it must pass a partic trigger chosen by the insurance company. The triggers vary by states’ insurance regulations and insurance companies. They usually apply when the National Weather Service (NWS) officially declares a storm or hurricane. 

Compared to other home insurance deductibles, hurricane deductibles are generally higher. They are usually percentage-based deductibles, but in some states, policyholders are given the choice of paying a higher premium to get a standard dollar deductible. 

  • Wind/hail deductibles

Wind and hail deductibles function similarly to hurricane deductibles in mostly being percentage-based rather than fixed dollar amounts. They are very common in places that undergo terrible windstorms and hail. It’s usually $5,000 when it applies.

  • Flood Insurance Deductibles

Flood insurance deductibles differ by state and insurance company and are available in both standard dollar amounts or percentages. You have the chance to choose one deductible for your home’s structure and another deductible for its contents. However, your mortgage company might give you a limit for your deductible to make sure you’ll be able to pay it.  

  • Crime Deductibles

Crime deductibles usually apply to vacation and rental properties. They are more susceptible to crime because of the periods you are not there to protect them. This deductible may also be applicable if you engage in home-sharing programs or share your home with unrelated persons. The amount usually ranges from $2,500 to $10,000.

  • Glass Breakage Deductibles

It applies to home insurance claims involving the glass parts of your home. You can choose to replace this deductible with a small additional premium.

  • Earthquake Insurance Deductibles

Depending on your location, earthquake insurance offers percentage deductibles ranging from 2% to 20% of your home’s replacement value. In states with more than average risk of earthquakes, the insurance companies usually set their minimum deductibles around 10%.

Is there a Standard Deductible for Homeowners Insurance?

No, there’s no standard home insurance deductible. However, most insurance companies put up deductibles of $1,000 and above. Some insurers offer smaller homeowners insurance deductibles of $500 and even as low as $250. It’s sporadic to see a company that offers no-deductible policies, but the policies are accompanied by higher premiums when that happens.

It’s advisable to go for a deductible of at least $1,000. Yes, you’d have to pay $1,000 when you file a claim, but a higher home insurance deductible lowers your premiums — most times by a huge amount.

Should You Keep Raising Your Deductible?

You shouldn’t just keep raising your deductible without a limit. Remember that you won’t make any claim below any amount you choose as your deductible. 

For instance, if you have an $8,000 deductible, you might have a very cheap premium, but you’ll only be able to file a claim on damages above $8,000. If someone stole your $2,000 laptop, your high deductible would overshadow the loss, and you’d have to pay out of pocket for the computer. 

On the other hand, if you had a $1,000 deductible, you’d have gotten $1,000 of the laptop’s value. But if you are comfortable not making claims on minor losses, then a high deductible would favour you.

How Do You Know the Right Home Insurance Deductible for You?

Your financial condition determines what home insurance deductible is right for you. We’ve broken this down into three conditions:

  1. Financially comfortable and well off

If you have a high income and are financially well off, it won’t matter whether you pay lower premiums for a high deductible or higher premiums for a low one.  

For this group, the decision is more of a mathematical one. It depends on the amount of money you can save from lower premiums against your judgement of the possibility that you’ll have to file one or more claims and pay the deductibles. Even if your calculation is wrong, the result won’t be devastating for you.

  1. Struggling financially

People with little spare money have the most significant need for lower premiums. At the same time, they are the least able to meet up with the requirement to pay a deductible when the need for a claim or multiple claims arises.

If you are in this category and lack an emergency fund, you may find having a high deductible easier if you establish access to borrowing funds. It could be an unused credit limit, a personal line of credit not secured on your home, or a home equity line of credit. However, borrowing in these situations should be considered a last resort.

  1. Financially stable, but not well-off

These are people in the middle class. If you fall within this category, you need to look at your finances and decide what home insurance deductible suits you best.

Is $1,500 affordable, but $2,500 too much on your savings? Then go for the lower deductible. Even though you won’t save as much as you would if you picked the highest deductible, you’ll still be happy you are saving some money.

You may even decide to put aside some money from each paycheck, so you can build up enough savings for a high deductible. Doing that can save you a lot of money each year.  

How do Home Insurance Claims Affect Your Rates?

Your record of making claims is one of the most significant risk pointers insurance companies use when calculating your premiums. The rule is if you’ve filed a claim in the past, you’re more likely to do so at another time.

So, after you file a claim, your insurer may increase your premiums when you renew, and you might end up paying more than if you did not report the loss at all.

When you file a claim, your insurance company will assign you a claims adjuster. Your adjuster’s assessment of your claim will determine the extent of your coverage. You can follow these proven strategies when dealing with the adjuster to get the most out of your claim.

How Does Home Insurance Deductible Work?- Frequently Asked Questions

What is a good deductible for homeowners insurance?

It’s best to go for a deductible of at least $1,000. Although you’d have to pay $1,000 to file a claim, a higher home insurance deductible would reduce your premiums by a vast amount.

Do I have to pay my homeowners deductible?

The amount you agree to pay out of pocket for an insurance claim before your homeowners insurance company will pay for the rest of the loss is your home insurance deductible. IIf your claim involves two or more property coverage aspects, you must only pay one deductible.

How is homeowners insurance deductible calculated?

Percentage deductibles mostly apply only to homeowners policies. They are calculated based on a percentage of the home’s total coverage. For instance, if your house is insured for $150,000 and your insurance policy has a 2 percent deductible, $3,000 would be subtracted from any claim payment you’ll get

Is it better to have a higher deductible for home insurance?

Raising your deductible means lower premiums. Lower premiums mean you are saving on homeowners insurance.
The insurer takes on less risk when you select a higher deductible amount, which lowers your premiums. A high deductible can decrease how much you pay for your homeowner insurance by 20% to 40%, depending on your insurance company and coverage.

How do I get a deductible waived?

Usually, deductibles are only waived when someone else agrees to pay the insured’s deductible. For instance, if you are in an accident that is not your fault, the other driver’s insurer may agree to pay your deductible.

What is an AOP deductible?

AOP or All Other Peril deductible is typically a standard dollar amount. The all peril deductible applies to covered property damages like lightning, hail, vandalism, theft, fire, etc. This deductible applies based on occurrence.

What does it mean to have a $0 deductible?

Zero-deductible car insurance means your coverage options don’t require you to pay any amount out of pocket for a covered claim. For instance, if you chose collision coverage with no deductible. If you have a covered claim for $2,000 in repairs, your insurance company will pay you the full $2,000.

Why is my homeowners deductible so high?

The fewer your claims, the higher your deductible will be. Some people also choose to increase their deductible because they don’t make a lot of claims. Your insurance premiums increase every time you make a homeowner claim, so you probably wouldn’t even be making claims for low-cost losses.

What does it mean when you have a $1000 deductible?

A higher home insurance deductible means a lower cost in your home insurance premium. For instance, if your insurance policy has a $5,000 coverage. A low deductible of $500 means your insurer would be covering you for $4,500. A higher home insurance deductible of $1,000 means your insurer would be covering only $4,000.

Bravo! Now you can answer the question- how does home insurance deductible work? Insurance companies can offer you attractive and seemingly generous savings for deductibles. However, like all discounts, there is a catch most of the time and may not be as attractive as they looked at first.

Every time you renew or modify your policy, shop around for competitive quotes. That is the only way you can make sure you’re getting the best deal. Be familiar with the significant factors that affect home insurance rates and get quotes for several deductible levels to see what the best deal for you is. Follow us on Facebook for more exciting home insurance content like this.

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