If a tree fell on your home tomorrow, would you be financially prepared to fix it? While most homeowners are protected by insurance, many couldn’t afford their home insurance deductible if they needed to file a claim.
In fact, the Federal Reserve found that two in five American households didn’t have enough funds for a $400 emergency expense, which is less than the average homeowners insurance deductible.
When purchasing coverage, you should think carefully about the homeowners insurance deductible you select. But how do you choose the right deductible? We’ll explain everything you need to know to make the right decision.
How Do Homeowners Insurance Deductibles Work?
Whenever you file a homeowners insurance claim, your deductible is the amount you’ll have to pay out of pocket before the insurance company takes over and starts paying for losses.
For example, if you have a $1,000 deductible and a burst pipe causes $10,000 in damage to your home, the insurance company will only cover $9,000 of the repair costs. The remaining $1,000 will be your responsibility to pay out of pocket.
As a general rule, the lower your deductible, the more you’ll pay in insurance premiums every month.
Types of Home Insurance Deductibles
There are two basic types of homeowners insurance deductibles that determine how much you’ll pay when you file a claim. Your policy will clearly state which type of deductible applies to each coverage.
Dollar amount deductibles
With this type of deductible, you’ll pay a set dollar amount whenever you file a claim. To give an example, let’s pretend you have a $500 home insurance deductible. A storm causes some minor damage to your home, with repairs costing around $1,000. You’ll cover the first $500 and your insurance company will pay the remaining $500.
Unfortunately, a much more severe storm blows through a few months later, this time causing $20,000 in damage. Your out-of-pocket costs will still be just $500; the remaining $19,500 will be taken care of by the insurance company.
Unlike dollar amount deductibles, percentage deductibles are based on your home’s insured value. For example, if your home is insured for $200,000 and you have a 2% deductible, you’ll have to pay $4,000 when you file a claim. If you decide to put an addition onto your home and its insured value increases to $250,000, your deductible will rise to $5,000.
What Are Disaster Deductibles?
Depending on your location and the insurance provider, different deductibles may apply to damages caused by certain natural disasters. This is more common if you live in an area considered to be high risk for specific weather events.
If your home state frequently lies in the path of hurricanes, your insurance company may impose a higher deductible for hurricane-related claims. Percentage deductibles are frequently used in this case.
Homeowners in central states, particularly Tornado Alley, may also face higher-percentage deductibles if their home suffers wind or hail damage. Most wind/hail deductibles fall between 1% and 5%.
Flood insurance deductibles
Standard home insurance policies don’t cover flood damage, so homeowners looking for this type of coverage will have to buy it separately. If you do decide to purchase flood insurance, keep in mind that the deductible will be different from your homeowners insurance deductible. The exact amount and type of deductible will depend on your location and the insurer.
Earthquake insurance deductibles
Earthquakes are another natural disaster not listed in basic homeowners insurance policies. Homeowners who purchase earthquake insurance should prepare to pay much higher deductibles than they pay with their home insurance. In high-risk states, earthquake insurance deductibles are often set between 10% and 20% of the home’s insured value.
How to Choose a Homeowners Insurance Deductible
Choosing the right home insurance deductible isn’t always easy. Here’s what to consider as you make a decision.
Look at your emergency fund
No matter which deductible you go with, you should always make sure you have enough cash on hand to cover it at a moment’s notice. When choosing a deductible, look at the contents of your emergency fund and think about how much you could comfortably afford to pay out of pocket if your home caught fire tomorrow. If the deductible you have in mind makes you wince, it might be a good idea to go with something more manageable.
Decide what you can afford in premiums
The compromise you make when setting a low deductible is committing to higher monthly premiums. When you get a quote for homeowners insurance, don’t be afraid to test out different deductibles to see how they’ll affect your premium payments. You may find that choosing a higher deductible makes coverage more affordable.
At the end of the day, choosing the right homeowners insurance deductible is all about finding the right balance between a deductible you can afford and premiums that don’t eat up your monthly budget.
What is the Standard Deductible for Homeowners Insurance?
The average homeowners insurance deductible is usually somewhere between $500 and $1,000, although, depending on the company, you may be able to choose a deductible as low as $250 or as high as $2,000.
Deductibles tend to vary by state, in part because local insurance regulations may affect the extent to which changing your deductible will raise or lower your premiums. However, homeowners insurance is also significantly more expensive in some states than others; in states where costs run high, more homeowners may try to save money on their monthly premium by choosing a higher deductible.
How Your Deductible Affects Your Homeowners Insurance Rates
Changing your homeowners insurance deductible is one of the most direct ways to control how much you pay in premiums. The lower the deductible, the higher the premiums – and vice versa.
According to the New York Times, the difference between a $500 deductible and a $2,000 deductible is a 16% savings in annual premiums nationwide. However, these savings vary significantly by location. For instance, North Carolina homeowners can expect to save 41% between these two deductibles, but Texas homeowners save just 6%.
The Bottom Line
Choosing the right home insurance deductible is an individual decision that isn’t always easy to make. When setting your deductible, try to find a balance between a premium and a deductible you can afford. The average homeowners insurance deductible is around $500 to $1,000, but it may be higher or lower for you.