Home Insurance Deductibles - How Do They Work?
Deductibles are what you are expected to pay out of your own 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 bad happens to your home.
Types of Deductibles
There are two ways deductibles are quoted 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 what is actually listed as 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 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. This should also affect how you choose what deductibles you would like on your policy. In some cases, you don’t have an option to choose certain deductibles as carriers can require a minimum % deductible for Hurricane damage. Keep in mind that these minimums vary from state to state and from carrier to carrier. In some states, they even have named storm deductibles, which are slightly more broad than hurricanes.
Should I Get The Lowest Deductible?
The most important 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 discounts.
How Do Covered Perils Affect Your Deductible?
How much your deductible will be ultimately depends on what peril is causing the damage. Perils refer to potentially bad things that could happen to your home.
The cost of your deductible depends on whether or not the peril falls under the kind of coverage you have. The above perils are typically covered under traditional homeowners insurance.
Some perils like water backup damage, mold, and flood damage would not be covered and need to be added on. These add-ons will often have a specific deductible independent of your main policy.
How the Wind/Hail Deductible Differs
Most of the claims for homeowners insurance fall under wind/hail damage. As a result, many insurance companies have a different deductible for the damaged caused during storms.
While your homeowners insurance may have a $500 deductible, your wind/hail deductible could be 1 percent of your home’s replacement value. If you have a $200,000 home, this means your deductible for that damage would be $2,000 despite your normal deductible.
When Should You File a Claim?
While you may be tempted to file a claim any time there’s damage to your house, you’re always better off evaluating the situation beforehand. Because you will have to pay the deductible first (it primarily exists to stop excessive claims), it’s not always in your best interest to file.
Imagine if your house experiences a burglary where someone smashes in through the windows, causing $1,000 worth of damage. You have a $500 deductible, so you file a claim. A few weeks later, there’s a storm that knocks down a tree that breaks through those same windows, dealing another $1,000 worth of damage. You file again. Then there’s a fire in your home that causes $10,000 worth of damage.
You might be thinking, “this is why I pay homeowners insurance.” And you’re not wrong. However, your premium could go up with each claim you make because you’re illustrating that you as an individual and/or your house is risk-prone. Each claim puts you at a risk for an increase or a non-renewal. So, if the damage is moderate, you’re often better off not filing a claim and paying out of pocket for repairs because it will be cheaper in the long run by keeping your premium down. 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?
A good strategy to prepare for any financial burden caused by damage to your home is to keep funds set aside that will cover the cost of your deductible. However, that may not always be easy for everyone. Always know what you are covered for in your policy. If you file a claim for something not covered in the policy, and your carrier rejects the claim, the claim still goes on your claims record.
Now you are better equipped to evaluate the best home insurance options for you. Good luck!
At your service,