The deductible is an important lever in a home insurance policy. Adjust its value, and you’ll see a direct effect on that policy’s premium. Understanding that relationship can help you build a policy that works for your budget, but you need to plan for both today’s financial goals and the unexpected future.
What is a deductible?
A deductible is the portion of a covered loss that you are responsible for before your insurance coverage applies. In many cases, it is subtracted from the amount paid on your claim.
For example, imagine a pipe bursts in your home and causes $10,000 in damage. Water damage is covered by your policy, and you have a $2,500 deductible. Your insurer processes your claim and pays $7,500, while you cover $2,500 for the repairs.*
Deductibles can be set as a fixed dollar amount ($1,000, $2,500, $5,000, or even $100,000), or as a percentage of your home’s insured value (for example, 3% of your Coverage A limit). Your policy may also have separate deductibles for certain events, such as wind, hail, hurricanes, or named storms.
While the concept of a deductible is simple to understand, in practice there are factors that complicate it. Work with your agent to make sure that you understand your specific policy terms, but also to make sure those terms meet your needs.
Finding the balance
Your deductible is one important way you can take control over your insurance premium. An insurance policy is a transfer of risk: Your home is a valuable asset, and potential damage is a risk to that asset’s value. When you buy an insurance policy, you transfer a large amount of that risk to the insurance provider. The deductible, however, is a piece of that risk that you keep.
The higher the deductible, the less risk for your insurance carrier – and the lower the premium. For example, you could choose a $25,000 deductible. That would mean that your home is covered for major damage, like a fire, but that you would completely cover any damage costing less than $25,000 to repair. That high deductible would allow you to save money every year on your premium, but you would also need to have enough money available to pay for repairs on your own.
On the other hand, if you’re not comfortable with a potential large out-of-pocket expense, you can choose a lower deductible and pay a higher premium on your policy.
When choosing a deductible, consider these questions with your agent:
- Could I comfortably cover this deductible on short notice?
- How much would I save by choosing a higher deductible?
- Are there separate deductibles for weather-related losses?
- Do the potential premium savings justify the additional financial responsibility?
Make your deductible work for you by balancing manageable insurance costs and an amount you are prepared to cover.
Understanding Your Policy
Your deductible should not be a surprise after your file a claim. Make sure you understand all the terms around your policy, but especially the deductible amount you will have to cover for a given peril. Review these details when you purchase coverage, and again at each renewal, making adjustments if your finances, property value, or policy terms have changed.
*Coverage, deductible options, and claim payments vary by policy and state. Refer to your policy documents for complete terms, conditions, limitations, and exclusions.
