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Homeowners insurance deductibles are an essential aspect of owning a home. With insurance owners select the amount of coverage they want to help protect their home and belongings, and the cost for this coverage is included in the monthly mortgage payment. While homeowners insurance is a common piece of the real estate puzzle, there are some components of the insurance coverage that are not so cut-and-dried.
The homeowners insurance deductible selected by the homeowner can change the financial responsibility of both the insurance company and the owner, as well as dictate the total cost of coverage over time. For these reasons, it is important to know how to choose the right homeowners insurance deductible from the start. Here’s what you need to know about your deductible.
Homeowners Insurance Deductibles
As part of each homeowners insurance policy, the insurance company offering coverage allows homeowners to select the deductible they prefer. A homeowners insurance deductible is the amount of money paid by the homeowner out of pocket when a claim is made. All other costs associated with a claim are paid by the insurance company, up to the policy’s limits.
To put a homeowners insurance deductible in real-life terms, think of it as the amount a homeowner must contribute to a financial loss due to fire, theft, or another disaster. For instance, if damage to the home took place and the insurance company estimated the repairs to cost $8,000, that amount would be covered by both the insurance company and you as the homeowner. With a $2,000 deductible, you would pay the first $2,000 related to the repairs and the insurance company picks up the remaining $6,000.
There are two types of homeowners insurance deductibles to be aware of as a homeowner. The first is a dollar-based deductible, which follows the example listed above. You select a dollar amount that you are comfortable paying from options provided by one of the best homeowners insurance companies.
The second type is a percentage-based deductible. With this option, you choose a percentage you are willing or able to pay should a claim be made against the policy; the insurance company pays for the remaining percentage of the claim. Homeowners pay the deductible, whether dollar- or percentage-based, each time a claim is filed for damage or loss.
How to Choose a Deductible
There are several considerations for how to choose the homeowners insurance deductible for your policy. First, the dollar amount or percentage selected correlates directly to what you owe if a claim is made against your insurance coverage. Homeowners need to consider what they can realistically afford in the event of a disaster or theft that results in financial losses. Selecting a high deductible without having the ability to pay it easily could put homeowners in a disastrous financial position for the long term. This is particularly true when there is no emergency fund established and taking on consumer debt to cover an out-of-pocket deductible is the only solution.
In addition to considerations about the amount one can afford if a claim takes place, homeowners also need to think through the affordability of the policy itself. A higher deductible means the insurance company is taking on less financial risk. This results in a lower premium payment. However, the month-to-month savings may not be enough to cover the full homeowners insurance deductible should something happen in the future. The ultimate goal of selecting a deductible for a homeowners insurance policy is finding the balance between the out-of-pocket cost for a claim and the month-to-month cost of the insurance coverage itself.
How Your Deductible Impacts Your Home Insurance Premium
When considering which homeowners insurance deductible to select for a policy, many homeowners focus in on the monthly premium amount added to their mortgage payment. This amount is paid into an escrow account and then paid once or twice per year to the homeowners insurance company on behalf of the homeowner. Lowering monthly premium payments may be a desire for homeowners, and selecting a higher deductible can help accomplish this task.
For example, increasing a homeowners insurance deductible to $5,000 may lower the monthly premium by several dollars each month, although the reduction varies greatly from one insurance company to the next. However, having a $1,000 deductible may mean the monthly premium amount is higher. Homeowners need to consider their ability to pay the out-of-pocket deductible (per claim) first, followed by the affordability of monthly premiums.
Homeowners are required to hold homeowners insurance coverage in most states, but determining the best options for coverage and selection of the deductible should not be taken lightly. It is necessary to evaluate both immediate and long-term financial implications of homeowners insurance deductibles to ensure the best decision is made.