Home Insurance Deductible: What Is It & How Does It Work?
- Insurance 101
- Home Insurance Deductible: What Is It & How Does It Work?
Deciding on the right home insurance deductible can be tricky because you never know when you’ll use it. There’s also no one-size-fits-all solution that can be followed for every policy.
By determining how much or how little you’re comfortable paying if you had to file a home insurance claim and then gauging how much or how much you’re comfortable paying each month in home insurance premiums, you can figure out the perfect deductible for your needs. So let’s get down to everything you need to know about home insurance deductibles.
What Is an Insurance Deductible?
A home insurance deductible is the amount of money you must pay toward an insurance claim before the insurance company steps in to pick up the remaining costs for damages. The claim must have occurred due to a covered peril and your insurer must also deem to cover the damage.
Home insurance deductibles work similarly to auto insurance deductibles but differ greatly from health insurance deductibles. So let’s say you have a $1,500 deductible on your home insurance policy and suffer water damage that totals $25,000 in damages. Once you file a claim, you’d have to pay $1,500 first before your insurance company picks up the remaining damage. After paying your deductible, the amount your insurer would pay you is $23,500 because they don’t reimburse your deductible.
A home insurance deductible is always going to be the same amount with each claim (with the exception of specialty claims). So if you sustain minor damage to your home that totals $800, it isn’t worth filing a claim. Since the amount is lower than your deductible, your insurance company isn’t obligated to pay for any of the damages, and you can keep your premiums low by not filing a claim.
Home insurance deductibles typically apply to the dwelling, other structures or personal property portions of your home insurance policy. However, liability and medical payments to others coverage don’t have a deductible attached to the claims.
How Do Insurance Deductibles Work?
Home insurance deductibles work simplistically. You must pay your policy’s deductible amount with each claim you file and then your insurance company will pick up the remaining covered costs up to your policy’s limits. Deductibles work by helping to reduce risk and offset the amount of money insurance companies must pay for claims.
What Is the Standard Deductible For Homeowners Insurance?
While there’s no standard deductible on every policy, there are two types of deductibles to choose from on a standard home insurance policy: dollar amount and percentage. Each has a place in your policy, but both aren’t good for the same claims.
Dollar Amount Deductible
A dollar amount deductible is the most common in home insurance policies, stating that you must pay a certain amount (usually $500 to $2,500) per home insurance claim that was filed. These deductible amounts are also usually lower than their percentage-based counterparts.
So, for instance, if you suffer a covered electrical fire that caused $7,500 in damage and you have a $1,500 deductible, you’d have to fork up $1,500 and your insurance company would then pay the remaining $6,000.
A percentage-based deductible is less frequent in home insurance policies, although it’s required in many states constantly affected by hurricanes. Percentage deductibles are based on the percentage of your dwelling coverage instead of being a set dollar amount.
If you have $300,000 in dwelling coverage and opt for a 3% deductible, you’d have to fork over $9,000 per claim before your insurance company stepped in to cover the remaining damages. While it’s typically true that a higher deductible means less in premium payments, that’s a pretty penny to shell out at once.
However, if you have $150,000 in dwelling coverage and have a 1% deductible, you’d only have to pay $1,500 per claim filed. People with higher value homes often skip the percentage-based deductible when they can and opt for the dollar amount option.
Special-Risk Disaster Deductibles
There are a few significant weather events that are associated with higher claims and, therefore, insurance companies have put them into special categories for deductibles. Damage sustained by hurricanes, wind and hail, earthquakes and floods each fall into separate categories for standard home insurance policies, so let’s check out what they are.
States that are at high risk for hurricanes have enacted special hurricane deductibles that work separately from the normal deductible on policies. Hurricane deductibles are always based on the percentage method, delegating your specific hurricane deductible as a percentage of your dwelling coverage — even if you have a dollar amount deductible on your standard policy.
Currently, Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia and Washington D.C. have all enacted hurricane deductibles.
The reason companies have done this is because hurricanes can cause extreme and total damage, resulting in billions of dollars lost. Florida is currently the only state where hurricane deductibles have been dictated by law instead of insurance companies.
Wind & Hail Deductible
Wind and hail deductibles work similarly to hurricane deductibles in that they’re mostly paid in the percentage method instead of the dollar amount. Although wind and hail deductibles can be found in other places, they’re most commonly put into place in the Midwest, where tornadoes occur often and can cause complete destruction in a matter of minutes.
If you’re looking for information about earthquake deductibles, you must first know that earthquake damage isn’t covered in standard home insurance policies. You must purchase separate earthquake insurance in places that see a great deal of earthquake activity.
Earthquake deductibles are charged in the percentage category and, since they’re rarer and can cause a great deal of destruction, the minimum deductible amount is usually at least 10% of your home’s dwelling coverage. Although the California Earthquake Authority has enacted a minimum 15% earthquake deductible throughout the state.
Similar to earthquake coverage, protection against floods isn’t covered in standard home insurance policies. You must purchase a separate flood insurance policy to be covered by flooding. Flood insurance deductibles can be paid in either dollar amount or percentage-based, depending on the state you live in and its proneness to flooding.
When Do You Pay the Deductible For Homeowners Insurance?
When filing a claim, you pay your deductible upfront to your insurance company. You must first file a claim, allow an adjuster to survey the damage and, once the damage has been calculated, your insurer will notify you of how much they intend to payout. If you accept their payout, you’ll have to pay your deductible first.
Deductibles and Your Insurance Rate
Since a lower deductible means you’ll pay less out of pocket per claim filed, it also means you’ll pay more upfront for your home insurance premiums. If you opt for a 5% deductible, you’ll be paying substantially less in premiums each month than you would if you had a $500 deductible.
There’s no such thing as the perfect deductible for every policy. Each person must evaluate their needs, how much they can afford to pay in premiums each month and how much they can comfortably pay out of pocket if a major disaster strikes.
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The editorial content on Clovered’s website is meant to be informational material and should not be considered legal advice.