Home insurance is a pressing issue today, with many Americans facing skyrocketing premiums. In some areas of Florida, California, and Louisiana, homeowners are even finding it difficult to secure any coverage at all.
A common suggestion for lowering your homeowners insurance premium or convincing an insurer to take you on is to raise your deductible. However, this can become expensive if (or when) you need to make a claim. Let’s explore some of the advantages and disadvantages of a high deductible.
Understanding homeowners insurance deductibles
A homeowners insurance deductible is the amount you must pay out of pocket before your insurance coverage kicks in. Here’s an example if you file a $5,000 claim:
- With a $500 deductible, you pay the first $500, and your insurer covers the remaining $4,500.
- With a $2,500 deductible, you pay the first $2,500, and the insurer pays the remaining $2,500.
Deductibles are usually fixed dollar amounts but can also be calculated as a percentage or a combination of both. The main point is that a higher deductible typically results in a lower premium. According to Insurance.com, on average, increasing your deductible from $500 to $2,500 can reduce your premium by about $500 annually.
For instance, if you pay $2,000 a year for homeowners insurance, this reduction could lower your payment to $1,500. While this is a significant saving, keep in mind that if you need to file a claim, you’ll be responsible for $2,500 in costs instead of $500.
Additionally, you would need to have that money saved, and if you filed multiple claims, any savings could be erased. Furthermore, filing multiple claims could increase your premium and risk the insurer not renewing your policy.
How a high deductible can save you money
In simple terms, if your annual savings exceed the additional deductible over time, you come out ahead financially. For example, if you save $500 annually by increasing your deductible by $2,000, it would take four years for the savings to cover the potential extra cost. After that, each year without a claim is a financial gain.
Premiums will likely continue to rise during that period, but you would still pay less with a higher deductible. If you went six years without a claim, you could save $3,000. Given that, on average, households file a claim approximately once every 10 years, the odds are favorable. This could mean saving $5,000 in annual payments over a decade, potentially only incurring your $2,500 deductible once.
However, what if you need to claim and don’t have enough cash? Ideally, you would have enough savings to cover your deductible before lowering your rate. Alternatively, you could save the money you save from paying a lower rate into a high-yield savings account to build an emergency fund for your home.
Unfortunately, real-world situations can be unpredictable, and disaster might strike when least expected. If you raised your deductible because you couldn’t afford your homeowners insurance, you might not be able to save extra money over time. Or, you might plan to save for emergencies but encounter issues immediately after raising your deductible.
In such a scenario, you might have to incur debt to cover the cost, negating any savings. For example, if you charge $2,000 to a credit card because you need the money quickly, with the average credit card interest rate over 20%, paying it down at $100 a month would take more than two years and cost almost $500 in interest.
Does raising your home insurance deductible make sense?
There isn’t a one-size-fits-all answer when it comes to deductibles. Raising your deductible can significantly reduce your annual homeowners insurance premium, but it also requires you to have more emergency funds available in case something goes wrong.
Before increasing your deductible, consider these steps:
- Ensure You Have Sufficient Funds to Cover the Higher Deductible: You might even need to pay a higher premium temporarily while you save up. It’s already stressful when things go wrong in your home; you don’t want to add financial strain to the mix.
- Calculate the Actual Savings: While we looked at average figures earlier, every situation is unique. For instance, there’s no benefit in raising your deductible to $2,500 if it only saves you $100 a year.
- Consider How Often You Might File Claims: Many homeowners avoid filing claims to prevent premium hikes. If this sounds like you, a higher deductible could make more sense.
Remember, increasing your deductible is just one strategy to lower your home insurance costs. Other methods include shopping around for the best rates with top homeowners insurance companies, bundling your home and auto insurance, and making home improvements such as installing a security system to reduce premiums.
Additional tips to save on home insurance:
- Shop Around: Comparing quotes from various insurance providers can help you find the best rate. Ensure you’re getting the coverage you need at a price that fits your budget.
- Bundle Policies: Many insurers offer discounts if you bundle your home and auto insurance policies. It’s worth checking to see if this can help you save money on your homeowners insurance.
- Improve Home Security: Installing a security system, smoke detectors, and deadbolt locks can sometimes earn you a discount on your insurance premium.
- Maintain a Good Credit Score: Insurers often use your credit score to determine your premium. Keeping your credit score high can help you secure a better rate.
In conclusion
Raising your deductible can be a strategic way to reduce your home insurance premium, but it’s essential to weigh the potential costs and savings. Ensure you have a plan in place to cover the higher deductible in case of an emergency and explore other cost-saving measures to get the best deal on your home insurance. Asking your insurance broker is a great way to fully understand your options.