Determining the Insurance Deductible

A deductible is the amount you pay out of your own checkbook in the event of a loss before the insurance company begins covering the expenses according to your policy. The higher your deductible (meaning the more you will have to pay yourself), the lower your premiums, and vice versa. Raising your deductible is one way of lowering premiums, but you are taking more risk on yourself, and you need to be able to afford the deductible if something happens to your home.

Risk vs. Cost

Normally, a deductible is a flat rate, and you can choose from a range of levels, usually starting at $250. The deductible can go up to $5,000 or more, depending on the policy. The amount you save on your premium depends on what level you choose; for example, you can save around 25 percent for a deductible of $1,000 over a minimum ($250) deductible. Your agent should be able to give you the difference in premiums for the various levels of deductibles so you can balance the risk versus the cost of premiums.

It’s also possible that you will have different deductibles for different kinds of damage. For example, if you have earthquake insurance, it may have its own deductible. Be sure to ask your agent about the different kinds of deductibles.

The New Percentage Deductibles

Many insurance companies are now offering percentage deductibles, meaning that the homeowner is responsible for a percentage of the home’s insured value (the cost to rebuild, not market value) rather than a flat rate. For example, if you are liable for 1 percent of your home’s value in the event of a loss, for a $250,000 home, you would be liable for the first $2,500.  Typically, a percentage deductible is from 1 to 5 percent.

When you think about your deductible, it is worth remembering that you are going to bear some of the cost in the event of damage to your home, no matter what. It’s just how much you can afford that will determine the amount of that cost. Also, insurance companies tend to raise premiums for homeowners filing too many claims, and the lower your deductible the more possibility you have of filing a claim rather than paying for damages yourself. In the long run, that could raise your premiums.

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