December 20, 2019

Home Insurance Deductible

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All home insurance policies have a deductible. How does a deductible work and will it impact the price of your policy? Read on for the answers.

A home insurance deductible is the amount you pay out of pocket when you file a claim. You can find your deductible on the declarations or cover page of your policy.

Insurance companies include deductibles to:

  • Limit the Number of Claims Filed
    Without a deductible, home insurance companies would be paying out on all claims, no matter how small.

  • Change People's Behavior
    If homeowners have to pay for preventable losses, they might take preventive action. For example, a homeowner might install home security features in a home to prevent a burglary.

Read on to learn more about home insurance deductibles.

Is home insurance tax deductible?
Home insurance is not tax deductible, although there are two exceptions allowed by the IRS:
  • You use all or part of your home for business.
  • You rent out all or part of your home and claim rental income.
Your homeowners insurance deductible may be tax deductible if your damaged property is in an area declared a disaster zone by the U.S. president.

What Is the Standard Deductible?

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The standard deductible is the minimum amount you can select. Most home insurance companies set $1,000 as the standard.

You can select a higher deductible amount but cannot go lower than the insurer's minimum deductible amount. Home insurance companies typically offer deductibles in amount of $1,000, $1,500, $2,000, $2,500, and $5,000.

The standard deductible covers the entire policy, minus specified exceptions. There may also be a disaster deductible for a specific event, such as a hurricane or windstorm. In those cases, it takes the place of the standard deductible.

What does it mean when you have a $1000 deductible?
A $1,000 deductible means you pay $1,000 out of your own pocket before your insurance company pays the rest of the claim.

What Is a Good Home Insurance Deductible?

The right home insurance deductible depends on your personal financial situation.

  • If you're looking for the cheapest insurance
    Choose a policy with a high deductible ($2,500 or more). You'll pay less short term, but more money if you have to file a claim.

  • If you can't afford a high deductible
    Choose a policy with a low deductible ($500). You'll pay more short term, but less long term if you have to file a claim.

  • If you prefer a middle ground
    Choose a policy with a midrange deductible ($1,500). It balances the cost of your policy against your out-of-pocket cost.

Cities with rising crime rates or frequent natural disasters often lead to homeowners claims. Every time you submit a claim, you have to pay the deductible. A low deductible for frequent claims makes your out-of-pocket costs more manageable.

How Do I Decide?
When choosing a deductible, consider things like:

  • The amount you have in savings for unexpected expenses

  • Funds you will be tapping into for home repairs, home maintenance, or home renovations

  • New expenses, like your child's activities, new car, school-related costs, etc.

  • Vacations or celebrations that you're planning to take

Home Insurance Deductible: $1,000 or $2,000
The major difference between a home policy with a $1,000 deductible and a home policy with a $2,000 deductible is price. A policy with a $2,000 deductible costs about 20% less than a policy with a $1,000 deductible.

But a higher deductible also improves your claims record. Only filing claims for larger losses versus many small losses leads to more savings. Most home insurers offer a claims-free discount of up to 20%.

How Does a Home Insurance Deductible Work?

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A home insurance deductible takes effect when you make a claim on a loss that is covered under your policy.

Here's how the process works:

  1. You call your insurance company to file a claim for the covered loss.

  2. The insurance company may send out a claims adjuster. This person determines how much it will cost to rebuild, repair, or replace the loss.
    • If the amount of the loss is more than your deductible, the insurance company sends you a check for the amount of the loss, minus the deductible.

    • If the amount of the loss is less than your deductible, the insurance company denies your claim. You are responsible for paying for the loss on your own.

We take a closer look at each scenario below.

Claim Higher Than Deductible
Joe's house suffered roof damage caused by a snowstorm. As the snow started melting, water began leaking into his house, damaging his living room floor and furnishings.

He calls and files a claim with his home insurance company. A claims adjuster is sent to Joe's home to evaluate the claim and determines the loss amount to be $35,000.

Joe's policy has a $500 deductible. The insurance company issues him a check for $34,500 ($35,000 minus $500). Joe pays the $500 directly to the contactor.

Claim Less Than Deductible
Janet lost her brand-new $899.99 mobile phone. She called the insurance company to file a claim. But since Janet's homeowners policy has a $1,000 deductible, her claim is denied.

Why? The replacement cost of the phone ($899.99) is less than her deductible.

When Do You Pay the Deductible for Homeowners Insurance?

You have to pay your deductible as soon as you file a claim. However, you pay it to the contractor doing the work, not your home insurance company.

Think of your deductible as a down payment to the contractor. Once it is paid, the work can begin—your insurance company issues a check to you or the contractor to cover the remaining balance.

Some home insurance companies partner with certain contractors. Their list of preferred contractors agree to do the work for the amount estimated by the insurer's claims adjuster.

What Happens if I Can't Afford My Home Insurance Deductible?

A home insurance company requires you to pay your policy's deductible BEFORE it pays out your claim. Not being able to pay your homeowners deductible will delay repairs to your home.

Some funding options to consider for paying your home insurance deductible are:

  • Using the equity in your home to take out a home equity loan

  • Taking out a loan against your permanent life insurance policy or 401(k)

  • Checking the credit available on your credit cards

  • Applying for a low-interest loan if your region has been declared a disaster area by the federal government

  • Borrowing from a family member

What Are the Types of Home Insurance Deductibles?

Dollar Amount Deductible
This means you pay a set dollar amount that applies to claims for all coverages under your policy. These coverages are:

  • Dwelling
  • Other structures
  • Personal property
  • Personal liability
  • Medical payments to others
  • Additional living expenses

Percentage Amount Deductible
You'll pay a percentage of the total amount of the loss each time you file a claim. So, if you have a 5% deductible and the loss is $10,000, you would be paying $500 of the loss. With percentage deductibles, there is a greater effect on your out-of-pocket cost.

Consider this example using a percentage amount deductible:

Sara's homeowners policy has a 2% deductible for hurricane windstorm coverage. Her dwelling coverage is $500,000. This means in the event of a hurricane windstorm loss, she would have to pay $10,000 out of her own pocket.

Remember, even a low percentage deductible can add up to a significant amount of money. Be sure to do the math before choosing this option.

Split Deductible
This policy has a set dollar amount for some coverages and a percentage amount for other losses. For example, a policy might have a dollar amount deductible for all coverages except hurricanes, which has a percentage deductible.

Disaster Deductible
Disaster deductibles are a dollar or percentage amount that applies only if a loss is caused by a disaster. They apply to catastrophes covered by either a homeowners policy or a separate disaster policy.

Examples of disaster deductibles are:

  • Hurricane deductibles
  • Wind/hail deductibles
  • Earthquake deductibles
  • Flood deductibles

Many homeowners policies have a dollar amount policy deductible and a percentage deductible for certain losses. For example, a home insurance policy might have a percentage deductible for a loss caused by windstorms and a dollar amount deductible for all other losses.

How Does My Deductible Affect the Cost of Home Insurance?

Your deductible will impact the cost of your home insurance. Here's how:

  • By choosing a high home insurance deductible ($1,000 and higher), you will save on the overall cost of your homeowners insurance.

  • By choosing a low home insurance deductible ($500 and lower), you will pay more for your homeowners insurance.

Review your insurance policies following a major life event to see if you need to change your deductible amount.

How to Shop Around for Home Insurance Deductibles?

Some insurance companies offer certain benefits or discounts that others don't. It pays to check out policies from several different insurance companies.

Read on to learn the cost savings benefits to look out for when comparing policies.

  • One Deductible for All
    These policies have one deductible that covers all losses. There is no separate deductible for special events, like windstorms, fire, etc. It's much easier to budget for a one-policy deductible.

  • Exclusions
    These are instances where you don't have to pay the deductible. For example, with some home insurance companies, the deductible only applies to property damage claims, not liability claims.

  • Deductible Waivers
    Some home insurance carriers may waive the deductible if you experience a total loss to your home.

  • Claim-Free Reward
    Numerous home insurers will provide a deductible credit if you haven't had any claims within a certain time period.

  • Reduced Deductible
    Some home insurance companies have a list of preferred home repair companies. By using a recommended contractor, you pay less out of pocket.

  • One Deductible for Multiple Policies
    If you place both your home and auto insurance with the same insurance company, the insurer may only require you to pay one deductible if you have a loss to both your home and auto at the same time.

  • Discounts
    Many home insurers reward you for lowering the risk of a loss. Some offer discounts for disaster proofing your home or installing home security and home safety features. This leads to a deductible savings because you won't need to file a claim.

Use an online insurance marketplace or a local independent insurance agent to get policy details and prices from numerous home insurance companies at once. It's fast and easy.

Bottom Line

The home insurance deductible is a very important piece of your homeowners insurance coverage. It reflects the amount you'll have to pay in the event of a loss.

However, choosing a deductible is a balancing act. Select an amount you can afford to pay but make sure it isn't too low to increase the cost of your policy.

Shop around and compare prices to get the best deductible deal for your home and budget.

More from CreditDonkey:

What Does Home Insurance Cover

How Much Home Insurance Do I Need

Average Cost Of Home Insurance

Home Insurance

Does Homeowners Insurance Cover Mold

Mold is bad for your health and expensive to remove. Find out when homeowners insurance will—and won't—cover the cost.

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