What Is a Homeowners Insurance Deductible?
Understanding your home insurance deductible and how it affects your premium rate, claim payouts, and more.
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Christine Lacagnina has written thousands of insurance-based articles for TrustedChoice.com by authoring consumable, understandable content.
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Jeff Green has held a variety of sales and management roles at life insurance companies, Wall street firms, and distribution organizations over his 40-year career. He was previously Finra 7,24,66 registered and held life insurance licenses in multiple states. He is a graduate of Stony Brook University.
There are many terms you need to become familiar with when shopping for insurance. Your "deductible" is just one of these. But it is critical to understand your insurance policy's deductible amount and how this affects other things about your policy, including the rate you pay for premiums each month or year and the amount you're eligible to receive from a claim payout.
An independent insurance agent can help break down all the aspects of your insurance policy, including its deductible. They can also help you adjust your deductible amount if necessary. But up first, here's a breakdown of home insurance deductibles and why they matter.
What Is a Homeowners Insurance Deductible?
A deductible is the portion of an insurance claim that you pay out of your own pocket. You're responsible for paying this amount every time you file a claim. You must pay your deductible before receiving any compensation from your insurance company for a covered incident.
One example of a common claim for homeowners insurance is water damage from an appliance or a burst pipe. If the cost to fix the damage to the home was $10,000 and your policy's deductible amount was $2,000, the insurance company would pay up to $8,000 to reimburse you for the damage if your claim was approved. You would pay $2,000 directly to the contractor.
Understanding the Types of Homeowners Insurance Deductibles
There are two types of homeowners insurance deductibles. These are:
- Flat amount (all perils): The flat amount type of deductible is a specific dollar amount, such as $1,000. The flat amount deductible usually applies to most of the events or “perils” that are covered by the policy, such as fire, theft, water damage, etc.
- Percentage: The percentage type of deductible is calculated as a percentage of the insured value of your home, which is stated in your policy. A percentage deductible is usually associated with coverage for disasters such as hurricanes, wind and hail, floods, and earthquake damage. If you live in an area that's prone to natural diasasters, there may be special rules that trigger the percentage deductible.
It's also critical to understand that not all home insurance claims are subject to the same deductible. For example, the liability section of homeowners insurance usually does not have a deductible. Further, other coverages, such as endorsements and floaters for high-value items, may have their own deductibles. An independent insurance agent can help review your specific policy with you to help you find out more about your coverage and its deductibles.
How Do Homeowners Insurance Deductibles Work?
Your homeowners insurance deductible is the same in that category or coverage, no matter how big or small your claim is. If you had a $1,000 deductible for your personal belongings, you'd pay $1,000 out of your own pocket, whether the claim amount was for $3,000 or $30,000 of damage, loss, or destruction.
Also, note that a homeowners insurance deductible applies to every claim you file. So, if you have a $1,000 deductible and need to file two separate claims, you'd pay $1,000 for each claim, or a total of $2,000 before receiving any reimbursement.
How Much Is the Average Homeowners Insurance Deductible?
Homeowners insurance deductibles are commonly between $500 and $2,000. Hurricane and other disaster coverage deductibles are typically between 1% and 5% of the insured value of your home. Ask your independent insurance agent to help you review the exact deductible amount for your specific policy.
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Why Do Homeowners Insurance Policies Have Deductibles?
Deductibles help lower the insurance company’s cost of paying out claims for policyholders. Insurance companies offer premium discounts to encourage folks to purchase homeowners policies with a higher deductible. If an insurance company offers a $0 deductible policy, the premium will typically be substantially higher than a policy with a deductible amount.
How Does a Home Insurance Deductible Amount Change the Policy's Premium Rate?
The higher the deductible, the lower the premium. Some insurance companies offer a $0 deductible. However, you'll pay much more towards your monthly or yearly premium for a policy without a deductible.
How much the amount of the deductible changes the premium can vary significantly depending on the company, the amount of the coverage, and where you're located. Always look at quotes with different deductibles from multiple companies when purchasing homeowners insurance. An independent insurance agent can do this for you.
What If I Can’t Afford to Pay My Deductible?
If you ever need to file a home insurance claim, you'll be responsible for paying the deductible amount yourself. That's why it's critical to carefully evaluate your deductible amount when you first purchase the policy. Consider the following:
- How much your emergency fund can cover if you have to file a claim, especially if your deductible is a percentage of the insured value of your home
- If your emergency fund is not enough, what lines of credit are available to you, such as a home equity loan
- If it would make more sense to get a policy with a lower deductible amount but higher monthly/yearly premiums
Your independent insurance agent can help advise you on what deductible amount works best for your needs and the needs of your family, depending on your unique circumstances.
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Are Home Insurance Deductibles Tax-Deductible?
Deductibles are not paid directly to the insurance company. The insurance company pays the claim amount minus the deductible to the contractor who completes your home repairs, and you pay the balance. Casualty losses may be tax-deductible to the extent the insurance company does not cover the claim. If you do have a loss, consult with your professional tax advisor.
Is Raising Your Deductible Worth the Monthly or Yearly Savings?
It depends on your financial position and the amount of potential savings. If the difference between a $1,000 and $2,500 deductible is $125 off your premiums each month or year, is that worth the additional $1,500 exposure in the event of a claim? You'll have to evaluate this for yourself.
If you're not comfortable with having to pay a higher deductible in the event of a claim, paying the higher premium may be a better choice. Keep in mind that your deductible applies to every claim made. If you have a high deductible and have multiple claims, the deductible could be a significant expense.
How to Choose the Right Homeowners Insurance Deductible Amount
You should consider three main things when choosing the amount of your deductible. These are:
- Your financial situation: Could you absorb the difference between the higher and lower deductible in the event of a claim? If you had multiple claims, how would the additional expense impact you?
- Your risk tolerance: If you selected the higher deductible, would the additional exposure worry you?
- Your premium savings: Is the amount you'd be saving on your premiums between the higher and lower deductibles important to you?
Selecting your home insurance's deductible amount doesn't have to be a difficult decision, especially when you enlist the help of an independent insurance agent. These experts can easily help advise you on the appropriate deductible amount for your needs.
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