Home Insurance Deductibles - How Do They Work?
Deductibles are what you can expect to pay out of your pocket before the insurance steps in to pay for damages. Knowing about hidden deductibles in your policy will save you a lot of time, money, and frustration if anything terrible happens to your home.
Types of Deductibles
There are two types of deductibles on home insurance policies:
- Percent-Based Deductible (%)
Percentage-based deductible means that your deductible is a set percent of the Coverage A or dwelling coverage in the policy. (this is NOT the market value of your home, but the first line of coverage in your home insurance declarations page). In most cases, it's between 1 and 5 percent of your home's replacement value.
So, if your policy has $200,000 of dwelling coverage for your home and you have a 2% deductible, then you would have to pay for the first $4,000 ($200,000 * 2%) of damages to your home before the insurance company starts paying. Keep in mind these % deductibles are often attached to special perils, like a Hurricane Deductible or Wind/Hail Deductible.
- Dollar Based Deductible ($)
You pay a set $ amount anytime you file a claim. The most common deductible is $1,000. However, it can be as little as $500 or as high as $10,000.
So let's say you have a home insurance policy in Texas with the following coverage and deductibles:
- $300,000 in dwelling coverage (Coverage A)
- $1,000 Deductible
- 1% Wind/Hail Deductible
- 2% Hurricane Deductible
Example 1 - A hurricane does $8,000 in damages
This would fall under the Hurricane Deductible, so you would pay the first $6,000 (300,000*2%) for damages, and the insurance company would cover $2,000 in damage. In this case, you may not even want to file the claim because your insurance rate will likely go up, forcing you to pay back that $2,000 to the insurance company.
Verdict: Don't File Claim
Example 2 - A hail storm deals $15,000 in damages
This would fall under the Wind/Hail Deductible, so you would pay the first $3,000 (300,000*1%) for damages, and the insurance company would cover $12,000 in damage.
Verdict: File Claim
Example 3 - A fire burns through $50,000 in damages
This would fall under the Regular AOP Deductible, so you would pay the first $1,000 for damages, and the insurance company would cover $49,000 in damage.
Verdict: File Claim
Hopefully, the above example shows you how deductibles can drastically change what you are responsible for in a claim situation. In some cases, you don't have an option to choose specific deductibles as carriers can require a minimum % deductible for hurricane damage. These minimums can vary from state to state. In coastal states, there are named storm deductibles, which are slightly more broad than hurricane deductibles.
Should I Get The Lowest Deductible?
The most crucial factor to take into account when choosing your deductible is whether or not you'll be able to cover the damages should anything happen to your home.
The benefit of a lower deductible comes at the cost of a higher premium. Over time, the extra money you pay towards your premium could be more expensive than the money you would pay out of pocket for a higher deductible.
If you plan not to file small claims anyway, aim for the higher deductible as carriers will throw you home insurance discounts.
How Do Covered Perils Affect Your Deductible?
Your deductible for a claim will ultimately depend on what peril is causing the damage. Perils refer to potential sources of damage to your home.
Water backup damage, mold, and flood damage are common exclusions from your standard home insurance policy. If you choose to add these perils as an add-on or separate policy, they will often have a specific deductible that is different from your primary policy.
How the Wind/Hail Deductible Differs
Most claims for home insurance fall under wind/hail damage. As a result, many insurance companies have a different deductible for the damage caused during storms.
Let's say your homeowners insurance has a $500 deductible and 1% wind/hail deductible. If your home insurance policy has $300,000 in Coverage A, this means your deductible for wind or hail damage would be $3,000.
When Should You File a Claim?
You may rush to file a claim any time there is damage to your house, but you're always better off evaluating the situation before acting. You will have to pay your deductible first, so it's not in your best interest to file small claims or claims close to the value of the deductible.
Imagine your house experiences a burglary with broken windows, causing $1,000 worth of damage. You have a $500 deductible, so you file a claim and get $500. A few weeks later, a storm knocks down a tree and breaks the same windows, doing another $1,000 worth of damage. You file another claim, and your insurance company drops you. Then a kitchen fire suddenly causes $10,000 worth of damage. You would be better off not filing the two small claims.
A general rule of thumb is don't file a claim if it is less than 2x-3x the value of the specific deductible for that claim.
How Can You Prepare?
Know your deductibles and have enough money saved to cover it. Know what your policy includes and what it excludes. If your carrier rejects a claim or you only get a $100 payout, the claim still goes on your insurance record for 3-7 years.
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