Understanding Homeowners Insurance Deductible

Your deductible is an integral part of your homeowner's insurance policy. Deductible also applies to life insurance, renters insurance, and car insurance.

For a homeowners' insurance cover, a deductible is an amount that you have to pay before your insurance coverage comes in to pay for qualified losses. The deductible is not usually reimbursed Unless your plan specifies otherwise; it's a minimum amount you pay toward the total damages. After paying your deductible, you can file a claim with the insurance company to pay the rest.

You must pay a homeowners insurance deductible before you can make claims on any damaged or stolen property that's covered by your policy.

Types of homeowner’s deductibles

There are three major main types of homeowners' insurance deductible, and they will be expressly defined in the policy and agreed to by you.

Insurance companies can offer diverse kinds of deductibles, but they generally present them as either a dollar-amount deductible or a percentage-based deductible. A dollar-amount deductible is the most popular because it provides one set figure that you will have to pay.

A percentage-based deductible requires you to cover a percentage of the total damages. Let's say you have a 10% deductible and the total losses are $10,000, you will have to cough $1,000 before your insurance company covers the rest.

Lastly, a split deductible is a hybrid of a dollar-based and a percentage-based deductible. It operates as a dollar-value deductible in most cases but will switch to a percentage-based deductible in particular scenarios, such as hurricane-related losses.

Flood insurance deductibles

Just like regular homeowners insurance, your flood insurance provider requires you to pay a deductible on claims. If you purchase flood insurance from the National Flood Insurance Program (NFIP), you can receive premium discounts based on the size of your flood insurance deductible.

If you have coverage with a private flood insurance company, then you're often given a choice between a $2,000 or $5,000 deductible. As with regular homeowners' insurance deductibles, the amount you choose affects your premium.

Choosing Your Homeowners Deductible

When choosing your deductible value, put into account what you can reasonably afford in the short term versus the long term. You should also consider what your annual household income vis a vis other out-of-pocket expenses you'll be expecting during the year. Choosing your deductible depends on what you personally can afford in the short term or long term.

Considering that let's say you have a lower deductible, you'll pay less from your pocket in the event that you file a claim. However, you are guaranteed to pay more in insurance premiums over a longer period of time. With a higher deductible, you will pay more in a covered claim, but your premiums will be lower as compared to when your deductible is lowest.

Most people opt for a higher deductible as this lowers your premiums, whereas the deductible would only be paid if they file a claim, which may never happen. If you do choose a higher deductible, you should set aside money specifically to cover your deductible if the insured risk occurs, and you file a claim. This way, you're financially ready and will not end up emptying your savings account that you planned on using for other emergencies.

How does your homeowners' insurance deductible amount influence your premium?

Since deductibles and premiums have an inverse relationship, this is tied to whether you or the insurance company takes a higher financial risk.

Many homeowners are willing to take a more significant financial risk to pay a lower premium and hoping that they will not need to file a claim. By so doing, they have a lower annual premium but will be accountable for a higher deductible if a claim is made. Other homeowners are more risk-averse and are willing to pay a higher premium to avoid a larger deductible if a claim must be made.