What You Need To Know about Homeowner's Insurance Deductibles

November 6, 2012 | Posted By: Christian Westerberg | Categorized in: Finance, Home & Auto

What are homeowners insurance deductibles?

When purchasing a home, the bank financing the loan will require you to buy homeowners insurance in order to protect their investment, as well as your own. As in the case of medical or car insurance, homeowners insurance is sold with set deductibles. The deductible is the amount of money the insurance company requires you to pay out of pocket before they will pay out on a claim. Deductibles vary highly and tend to correspond with the type of coverage the policyholder is purchasing.

How are deductibles determined?

Homeowners insurance covers various situations, depending on the policy, and the policy directly affects the deductible. There are two different ways deductibles are typically calculated:
  • As a percentage- This method of calculation is not used on all types of insurance; it is most often used for disaster coverage, such as windstorms and earthquakes. Typically, the deductible is calculated at 1-5% of the insured value of the home. Therefore, if the home is valued at $250k, the deductible at 1% would be $2,500.
  • Flat Amount- Traditionally, homeowner's insurance deductibles are a flat amount. Most standard homeowner's policies have deductibles that are calculated in this way and while the deductibles vary from policy to policy, they are fairly predictable. Common deductibles are $500, $1000, $2500 and $5000.

Use Your Knowledge to Save Money

When purchasing an insurance policy, many homeowners are tempted to go for the lowest possible deductions because, in their minds, the less they have to pay out of pocket in the event of an emergency, the better. There is another way of looking at it, however, and it's important to look at all angles before finalizing an insurance policy. The reality is that the higher the deductibles are, the lower the monthly premiums are going to be. This brings homeowners to a crossroads in the decision making process.

On the one hand, a $5000 deductible is often unattainable for homeowners. You may be able to comfortably afford a mortgage and pay your bills but that's not quite the same thing as being able to drop $5000 unexpectedly. Nobody really expects to have to file an insurance claim; those situations are almost always a surprise. So obviously, it's important to get the deductible down to a manageable level. However, saving money in the long-term is a goal that all homeowners share and the best way to do that is to get the monthly premiums down to as little as possible. After all, you will be paying those premiums every month for the rest of the time you own that home, whether or not you ever need to file a claim.

The best practice, then, is to set the deductibles as high as you can reasonably afford to pay them. Then, make sure you always have that much set aside in savings so that if a claim must be filed, you can pay it easily. The extra planning and higher deductible is guaranteed to save you money in the long run. Just be sure not to set your deductibles so high that you are in a hopeless situation in the event of a disaster. Homeowner's insurance isn't much good to you if you cannot afford to file a claim.

Christian Westerberg contributed this guest post for HomeInsurance.com. Christian is a freelance writer. He has worked extensively in the insurance industry and enjoys sharing his insights on various insurance blogs.
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