How to Choose the Right Deductible for Your Home Insurance Policy
You likely don't give a lot of thought to your home insurance deductible until you have to file a claim. It’s smart to think ahead when it comes to your deductible, though, because if wind-driven rains cause your roof to leak or a cooking mishap causes fire damage in your kitchen, the amount of your deductible could have a major impact on your financial comfort.
Choosing the right deductible is a balancing act between your monthly or annual premiums and how much financial risk you're willing to take on if you have to file a claim. In general, a lower deductible will cause you to pay a higher home insurance premium (and vice versa). But, a higher deductible means you'll have a larger out-of-pocket cost if a disaster strikes.
What is a home insurance deductible?
Most types of insurance policies, including homeowners insurance, require a deductible. The deductible is how much money you have to pay before your insurance coverage kicks in. Deductible amounts vary by company, but you can usually choose a deductible between $500 and $5,000.
For instance, say strong winds cause a tree to fall through your bay window. Between the broken window, damaged siding, ruined furniture and smashed TV, your total covered damage is $8,000. If your policy has a $2,000 deductible, this means you’ll pay $2,000 toward repairing the damage or replacing your personal property, and the insurance company will pay for the remaining $6,000 of covered losses.
Choosing the right deductible amount (and periodically adjusting it during your homeowners insurance checkup) means striking a financial balance. If you choose a deductible amount that is too high, you could have to pay for thousands of dollars worth of damage yourself, potentially straining your budget. But if you choose a deductible too low for your financial circumstances, you could find yourself paying unnecessarily higher home insurance premiums.
Types of home insurance deductibles
Depending on your insurance company and the type of homeowners coverage you have, you may have one of the following types of deductibles:
Flat deductible: Flat deductibles are the most common type of deductibles for home insurance policies. These deductibles are a fixed dollar amount, such as $500 or $1,000, and tend to be the standard deductible for most policies.
Percentage-based deductible: Percentage-based deductibles are usually found on wind, hail and hurricane losses or policies related to earthquake damage. They’re calculated as a percentage of the property's value. For example, if you own a home worth $300,000 and have a percentage deductible that is 1% of your home’s value, that means your deductible is $3,000. Some policies have a combination of both: a standard deductible as well as a percentage-based hurricane deductible that kicks in if you file a claim for windstorm damage. This type of coverage is increasingly common in areas prone to these types of disasters.
How deductibles affect your homeowners insurance premiums
When choosing a homeowners insurance deductible amount, consider that there is a trade-off between that amount and your premium total: The higher your deductible is, the lower your premiums will be, and vice versa.
When you opt for a higher deductible, you take on a larger share of up-front repair costs if you have a claim. Since you’re shouldering more of the risk, your insurance company charges you a lower home insurance premium. If you want to avoid that risk with a lower deductible, you can expect to pay a higher premium.
What is a good home insurance deductible?
Companies usually have several deductible options to choose from, and no one deductible amount is right for everyone. The best deductible amount for you is dependent on your answers to these three questions:
How big is your emergency fund?
If a fire wrecked your kitchen, how much could you afford to pay up front for repairs or to replace damaged appliances? If you have a healthy emergency fund with a large amount of money tucked away — enough to cover at least six months of expenses — that financial cushion means you can likely afford to choose a higher deductible amount. By contrast, if your financial situation isn't as secure, it might make more sense to opt for a lower deductible.
How often do natural disasters occur in your area?
Unfortunately, natural disasters and weather-related damage are more common in some locations than others. If you live in a disaster-prone area, a lower deductible on your homeowners insurance policy might be prudent. For instance, if you live in a high-risk area for hurricanes such as Florida or the Gulf Coast, you may be more likely to submit a claim. Likewise, homeowners in wildfire-prone Western states and areas prone to tornadoes and hailstorms in the Midwest might want to evaluate their disaster risk, as well.
What is your mortgage lender's requirement?
Mortgage lenders require borrowers to maintain minimum coverage limits. In addition, some lenders impose restrictions on maximum deductible amounts to protect their investment. For example, some mortgage lenders may prohibit deductibles higher than 1% of the property's value. Review your loan agreement to determine the maximum deductible amount permitted.
Choosing a home insurance deductible
Now that you know how home insurance deductibles work, you can choose an amount that works for you. Along with choosing actual cash value coverage or replacement cost coverage, choosing your deductible amount is one of the most important insurance decisions you'll make as a homeowner. A lower deductible makes sense if you don't have a large amount of savings or are more likely to file a claim, while a high deductible may be a better choice if you have a financial safety net and want a lower premium.
For many homeowners, a deductible between $1,000 and $2,500 is a good middle ground for homeowners balancing premium affordability and out-of-pocket expenses after a home insurance claim. When you’re shopping around for home insurance quotes, don’t forget to make sure that the deductible amount is one that you’re comfortable paying.
If you’re still not sure what deductible amount is right for you, contact your insurance representative. They can walk you through the pros and cons of different deductible amounts and come up with personalized advice for your insurance coverage.
This story was created in partnership with Money.com.
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