Homeowners policies require you to pay deductibles for certain types of claims. Deductible levels play a role in how much you’ll have to pay when filing a claim and your annual insurance rate. Choosing the right deductible levels is straightforward, and insurers allow you to choose deductibles that fit your finances. However, choosing the right deductible levels requires balancing what you can afford to pay with the costs of recovering from a major disaster.
What Are Homeowners Insurance Deductibles?
Homeowners insurance policies have deductibles, the amount of money the policyholder must pay out of pocket before the policy will start covering a loss. For example, if your home suffers $2,000 in roof damage during a storm, and your policy has a $500 dwelling coverage deductible, your insurer will pay a maximum claim of $1,500. If you don’t purchase enough homeowners insurance, you might have to pay substantial out-of-pocket costs in addition to a deductible following a major loss. However, homeowners insurance policies also set limits for each type of coverage. For example, you may have $300,000 in dwelling coverage to rebuild your home and $150,000 in personal property coverage. Insurance providers often require policyholders to carry dwelling coverage equal to 80% to 100% of the home’s replacement cost. The declarations page of a home insurance policy details coverages and their limits, along with deductible levels.
How Insurance Deductibles Are Calculated
Typically, home insurance deductibles are calculated in one of three ways:
Flat Deductible
If your policy has a flat deductible, you’ll pay a fixed amount each time you file a claim. So if you choose a $1,000 dwelling deductible and your house sustains $5,000 in fire damage, the insurer will pay a claim up to $4,000, and you’ll have to pay the rest.
Percentage Deductible
An insurer may give you the option to choose a percentage deductible, which calculates your out-of-pocket costs based on a percentage of your coverage. For instance, if your policy carries $500,000 in dwelling coverage and you choose a 1% deductible, you’ll have to pay the first $5,000 of a covered loss.
Split Deductible
A split deductible policy combines fixed-dollar deductibles and percentage deductibles depending on the coverage category. For example, a policy may have a percentage deductible for hurricane damage, but a flat deductible for fire losses.
How Do Homeowners Insurance Deductibles Work?
After filing a claim for a covered loss, your insurance company will tell you the settlement amount, which is the sum of money you’ll receive for damages to your property. The settlement amount will reflect the amount of losses, minus your deductible. For instance, if you have a $1,000 dwelling deductible and your house sustains $5,000 in damages, the insurer will offer a settlement of no more than $4,000. In some cases, minor damage may cost less to repair than your deductible, so the provider won’t accept a claim. Deductibles may not apply to some types of property. For example, if a piece of jewelry is covered by a scheduled property endorsement, a deductible might not apply.
Claims and Deductibles
After filing a claim, an insurance adjuster will inspect your home to assess losses and determine how much money it will take, minus applicable deductibles, to make repairs and replace personal property. Sometimes, the adjuster will offer a settlement on the spot and issue payment. In such cases, you can ask the insurance company to reopen your claim if repair costs exceed the settlement payment. Typically, you must make the request within a year of the calamity. Or the adjuster may offer a total settlement amount and issue a partial payment. This way, you have the funds to start the repair process. Later, the insurer will issue a final payment to complete the settlement and close the claim. If your home is mortgaged, the insurer will likely work with you and your lender in the event of a catastrophe. Rather than paying you directly for a dwelling loss claim, the provider may require the lender to endorse the settlement check and place the funds in escrow to pay repair costs. A lender may need to review a contractor’s estimate and may require its approval of the final renovation before releasing escrow funds. Let’s look at a few examples of how claims and deductibles might work.
A family’s home burns to the ground during the holiday season. The homeowners policy has $250,000 in dwelling coverage with a $2,000 deductible. The insurance company would settle the dwelling claim for $248,000.A tree limb smashes a home’s window, which costs $200 to repair, and rain destroys a $3,000 sofa. The home insurance policy has a $2,000 dwelling deductible and a $500 personal property deductible with a personal property replacement cost endorsement, which pays to replace items at current prices. The insurance company won’t accept a claim to repair the broken window because it will cost less than $2,000 to repair, but will reimburse the policyholder for the cost of replacing the sofa, minus the $500 deductible.A policyholder’s wedding ring, which is covered by a scheduled property endorsement (an optional add-on to increase coverage limits on high-value items), slips down the kitchen drain. The scheduled property endorsement has no deductible, so the provider will settle the claim based on the ring’s value and coverage limits.
Premiums and Deductibles
Deductible levels impact your home insurance rate. Choosing high deductibles offers a lower premium, but you will have to pay more of your own money when you file a claim. If you choose low deductibles, you’ll pay less out of pocket when disaster strikes, but the carrier will charge a higher rate.
How To Choose Your Deductible
Deductibles for home insurance policies usually range from $500 to $5,000. Choosing the right deductibles is subjective and depends on your personal finances. When setting your deductible levels, consider two primary factors.
Your insurance premium: For lower premiums, choose higher deductibles.Out-of-pocket repair or replacement costs: If you have ample money and can afford to foot the bill to replace personal belongings and to pay some repair costs, a high deductible might be the best choice for you.
