A home insurance deductible is the amount of money you have to pay before your homeowners insurance policy can help you with your expenses. Choosing the right deductible is important, and it can impact your premium as well as how much you get after a claim. Learning more about deductibles can help you choose a homeowners insurance policy that’s suitable for your needs.
How Do Home Insurance Deductibles Work?
Homeowners pay for repairs out of pocket and send proof of that payment to their insurance company to show progress towards meeting their policy’s deductible. This means that if you have not met your deductible amount yet, you will still file a claim but then instead of paying your insurance company, you would directly pay the professionals hired to make the repairs, such as the contractors.
For example, a severe storm could cause $5,000 in damage to your roof. If your homeowners insurance policy has a $500 deductible, you would pay that deductible — $500 — directly to the roofing company. The roofing company would provide you with a receipt as proof of payment.
You would then submit that receipt to your insurer to show that you have met your deductible. From that point on, the insurer would pay the outstanding balance of $4,500. Your insurer could send a check directly to the roofing company, or opt to issue a check in both your name and the roofing company’s name, requiring both parties to sign to receive the funds. In some circumstances, the insurance company may issue the check directly to the homeowner.
Keep in mind, though, that your insurance company will only pay for the balance left after you pay your deductible. If your home has suffered damage that costs less than the amount of your deductible to repair, your homeowners insurance will not pay for any repairs and you will have to cover it entirely out of pocket. For example, if a severe storm caused $490 in damage to your roof and your homeowners insurance policy has a $500 deductible, you would be responsible for covering the entire amount out of pocket.
If there’s a natural disaster severe enough to declare a home a total loss and the owner decides not to rebuild, the insurance company would pay for the value of the home up to the policy limit. This is calculated by subtracting the deductible from the overall home valuation.
Deductibles Renew With Each Claim
Another aspect of home insurance deductibles to keep in mind is that unlike health insurance, which often has a yearly deductible, homeowners insurance deductibles renew with each claim. This means that the deductible is “reset” for every claim instead of adding up with each claim.
For example, if your home suffers $400 in damage and you have a $500 deductible, you cannot make a claim on your insurance because the cost to repair is lower than your deductible amount. If you then have another unrelated $300 in damage later, your insurance still may not cover it because it is still below your deductible amount, even though both claims together total more than $500.
Flat Deductibles vs. Percentage Deductibles
Some policies have a flat deductible for homeowners insurance, and others use a percentage. Flat deductibles feature a fixed dollar amount. This is usually $500 to $2,000, but the deductible can be as low as $250 or higher than $5,000. With flat deductibles, the amount you pay for your deductible stays the same no matter the size of your insurance claim.
Many percentage deductibles are for claims related to wind, hail, or hurricane damage. A percent or percentage deductible is based on a percentage of your home’s insured value. For example, someone with a home insured for $300,000 and a 5% deductible would need to pay $15,000 towards repairs before their homeowners insurance would step in.
For example, if the home suffered $20,000 in damage, the homeowner would need to pay for $15,000 of the repairs before the insurance company pays for the remaining $5,000. A policy with a percentage deductible usually has a lower premium or rate than flat deductible policies, but the risk is that if you need to make a claim, your deductible may be significantly higher than a policy with a flat deductible.
How to Choose the Best Homeowners Insurance Deductible For You
If you choose a high deductible for homeowners insurance, you can expect a lower premium. The reverse is also true: with a low deductible, you can expect a higher premium. The premium is the amount you pay for your insurance policy either monthly, quarterly, semiannually, or annually to keep the policy active.
If you rarely make claims on your homeowners insurance, a high deductible could be a good idea as you would be at low risk of needing to make a claim and meet your high deductible before your insurance kicks in. With a lower premium, you would save more money on your regular recurring premium costs. You could put the money you would otherwise spend on a higher premium into a savings account and only access the funds if you experience a loss and need to pay your deductible. Until then, your money can earn interest and grow with time.
However, if you have an older home or if you live in an area that’s prone to fires, flooding, or other natural disasters, choosing a lower deductible could be more prudent. Even though the recurring premium may be higher, the lower deductible amount makes it more likely that you can meet that deductible with every claim and have your insurance help pay for repair costs. Over time, the lower deductible could help save you more money even if your premium is higher.
Benefits of a Lower Deductible
With a low deductible, you can lower your risk of a large repair bill after damage. More than a third of people in the United States would have trouble paying an unexpected expense of $400. If your household has a tight budget, a low deductible can help you avoid debt. However, you may need to pay more for your homeowners insurance policy’s premium, even if you used the same company for a while without making a claim.
Benefits of a Higher Deductible
A high deductible can help you keep your premium low because your insurance company does not protect you from as much risk. It can work well for people with enough in an emergency fund to cover a large deductible and any other expenses. If you have a good credit score and are willing to pay some interest, you can pay your deductible with a credit card or a loan. For people who have plenty of savings, raising a homeowners insurance deductible can help save hundreds of dollars per year.
Do You Need a Disaster Deductible?
Disaster deductibles are mandatory in some states, and even if it is not, you may benefit from having one if you live in an area prone to extreme weather events. A disaster deductible is an amount you need to pay after certain events, and it can be different from your regular deductible.
Wind, hail, and hurricanes are often covered by standard homeowners policies, but claims that involve these events have a percentage deductible even if the deductible is usually a flat amount. Many people buy flood and earthquake policies separately from their regular homeowners insurance. Mandatory disaster deductibles apply for hurricanes or wind and hail in:
- New Jersey
- New York
- North Carolina
- Rhode Island
- South Carolina
- Washington, D.C.
In some states, like Texas, the deductible kicks in for any wind or hail storm. In others, it only applies in some circumstances. For example, Connecticut triggers hurricane deductibles when a hurricane in the state produces winds of more than 74 mph, but in Delaware, a hurricane watch or warning is enough.
Earthquake insurance is optional, and it usually has a disaster deductible from 5% to 20%. Earthquake insurance policies are mainly available in California, Washington State, and Missouri. In all of the United States, flood insurance is required for people with mortgages who live in special flood hazard areas (SFHAs). If you’re a victim of a federally declared disaster, you can deduct the amount you paid for your deductible from your income when you pay your taxes.
Understanding how a home insurance deductible works and choosing it carefully can help you reduce your expenses. You can decide whether you want lower insurance payments or more protection from sudden expenses.