June 19, 2015
The Home Deductible Conundrum
Will choosing a higher deductible lower my insurance premium? Should I choose a lower deductible or a higher deductible? What deductible should I choose for my new home?
The Home Insurance Deductible:
A deductible is “An amount the insurer will deduct from the loss before…” paying out the policy up to the limits. Says IRMI or the International Risk Management Institute. A deductible is essentially your share that you cover in the event of a covered loss.
Your home insurance deductible is one of the few numbers that you as a consumer can choose that helps set the price (or premium) of your insurance policy. If you choose a lower deductible your premium will go up. However if you choose a higher deductible than your rate will go down. The deductible is the portion that you will pay in the event of the claim for a covered loss up to the Insurance limit.
In a simple example, if your home burns down and the total cost to replace it is $200,000 dollars, you would get $198,000 with a 2,000 deductible. Make sense? In another example using some of those numbers, if you had a $1,500 claim with a $2,000 deductible, you would not be able to make an insurance claim since the claim is lower than the deductible. Got it you say, I now understand. Hold on.
Time to consider your deductible
A overly simplified understanding in the use of deductibles can be somewhat perilous. Raise it to lower your costs or lower it to increase coverage, sounds simple enough. What possible could be the problem with this? For one, your insurance premium is calculated using a variety of input data, some about your home and some about you. Many (if not all) are regulated by your state governing insurance body (so there are differences). One of these data points is your insurance claims history. If you have more insurance claims on your property insurance, generally you will pay more for home insurance. If you have a claims free history (in the past 3 or 5 years) you will probably pay less in insurance premium.
Therefore there are essentially two main considerations
The first consideration is that by having a higher deductible you will pay less in insurance premiums, all else being equal. This will save you money
Consideration Two is simply by having a higher deductible one will make less insurance claims overall, why? Again using the example of the two thousand dollar deductible, if you have a $1,500 claim you will not be able to file an insurance claim. If you had had a $1,000 deductible you may have been able to file a claim for a covered loss. This could also save you money.
This is why raising your insurance deductible will save you money from two different directions. Filing less claims and pure insurance computation.
So Should I choose a lower deductible or a higher deductible?
It really depends on the math for you and your family. If you have the money set aside in a bank account, I can think of no better use than to slightly raise your deductible and pocket the savings. If you do not have the necessary money saved, I rarely would consider making this recommendation. My preference for my clients is and has always been to Insure What you Cannot Afford to Replace Yourself.
What deductible should I choose for my new homeowners insurance policy?
In a perfect world, you will be given multiple options for deductibles when you go to sign up with a new insurer. You would choose the one that best fits your financial savings accounts and which provides you the coverage that you need. I realize, however, that many folks want some sort of magical number to latch onto. In general I find that in California the best number may be .5% (half a percentage point) of your Coverage A Amount. So if your home is insured for $500,000 (five hundred thousand dollars) than $2,500 (two thousand five hundred dollars) may be a good solid deductible to go with. Warning, some Mortgage banks may not “approve” of a deductible at this level, so check with them. Also many insurers have various deductible levels that may not match up exactly with your desired coverage amount.
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Scott W Johnson -California License 0H11625
Marindependent Insurance Services LLC -California Insurance License 0K10734
The definition of a covered loss for your insurance policy can and will only be found in your insurance policy, so please read your own policy to know what is and what is not covered. Your current insurance limits and your current insurance deductibles and your coverage A amount, should be located on your declarations sheet.
Please read my disclosure. Speak with a licensed insurance agent in all instances when considering property insurance including but not limited to home or homeowners insurance. Thank you for reading The Home Insurance Deductible – The Home Deductible Conundrum.
