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You may have carefully considered your auto and home insurance deductibles when you first purchased your policies, but you probably haven’t given them much thought since. If so, it might be worth re-evaluating. Having the appropriate deductible for your situation not only provides peace of mind, but might save you money.
A deductible is the amount a policyholder must pay out of pocket before the insurance company pays the covered amount on a claim, up to the policy limits. It means the insurance agency and the insured agree to share the risk according to a predetermined formula.
Higher risk, lower premiums
It’s important for you to be comfortable with the financial risk each deductible represents. But it’s also important you balance the risk and the upfront cost of your premium.
Most policyholders don’t file claims very often. Choosing a higher deductible for a specific type of coverage typically reduces the premium for that coverage. Thus, a higher deductible for your homeowners and auto policies may be a way to save money over time and still protect yourself financially from a major loss you couldn’t afford to pay on your own.
You may want to calculate how much you’d save by raising your automobile insurance collision and comprehensive deductibles from $250 to $500 or from $500 to $1,000, and then ask yourself whether the amount saved is worth the additional financial risk. The same goes for raising your homeowner's insurance deductible from $500 to $1,000 or even higher.
If you already carry a high deductible or decide to raise it to reduce premiums, consider maintaining an emergency fund to cover the amount you might owe in the event of an accident, theft or fire.
Standard homeowners policies typically have a flat deductible expressed as a dollar amount. These policies offer protection from fire, lightning, theft, wind, and other stated “perils,” but natural disasters such as earthquakes and floods are usually excluded.
If you live in an area at risk of a natural disaster that isn’t covered by your homeowner's policy, you may need a policy endorsement or a separate disaster insurance policy. For this type of coverage, a larger deductible based on a percentage of home value might apply. For example, if a property is insured for $200,000 and the policy has a 2% hurricane deductible, then the first $4,000 of a claim must be paid by the homeowner.
Earthquake policies typically have deductibles ranging from 2% to 25% of the home’s replacement value, depending on the region’s perceived level of risk and other factors.1A basic policy only covers the house, but more comprehensive coverage to include other structures may be available for a higher cost.
Keep in mind if you have a high deductible, you need a larger emergency reserve for potential out-of-pocket expenses.
When purchasing or reviewing a policy, it’s important to ask about deductibles and compare the rates for each of the available options. Your insurance agent can address your questions and make coverage recommendations based on your potential risks and financial situation.