Your guide to home insurance deductibles

Your home insurance deductible is the amount your insurer subtracts from a claim payment, so you hand it to the contractor doing the repairs instead of writing a check to your insurance company. Raising it lowers what you pay in premiums every year and raises what you owe on the day a tree comes through the roof.

Homes in disaster-prone areas often carry a second deductible for hurricane, wind or hail damage, and that one is usually a percentage of the amount your home is insured for rather than a flat dollar figure. On a large policy, the percentage can climb high enough that a moderate claim pays you nothing at all.

To pick your deductible, look at what you have in savings and choose the deductible you could pay in full the day a storm hits. If that amount is higher than the deductible on your policy now, raising it lowers your premium every year you go without a claim.

How do homeowners insurance deductibles work?

A deductible is the amount you agree to pay out of pocket when you file a claim. A standard rule of thumb is to select a $1,000 deductible to lower premiums while keeping your out-of-pocket costs manageable.

“With most home insurance policies, your premium/cost will decrease as your deductible increases,” says Michael Cohen, president and founder of Bering Insurance Partners in metro Atlanta.

To select the right deductible, you need to consider:

• Your monthly budget: If you need some breathing space in your budget, increasing your deductible should decrease your premium payments.
• Your emergency fund: Before you select a high deductible, be sure you have enough in savings – or another liquid asset – to cover the deductible if you file a claim.

“You may only see a small difference in cost if going from, say, a $1,000 deductible to a $1,500 deductible,” Cohen says. “The difference would be more dramatic going from a $1,000 deductible to a $5,000 deductible.”

But if you don’t have $5,000 in the bank, you could find yourself short of cash to make repairs after a disaster. Check your savings balance before you pick a number, and set your deductible at the most you could pay in full tomorrow without draining the account.

Does my deductible change for hurricane, hail or earthquake damage?

Most home insurance policies carry a flat deductible, a set dollar amount you pay on any claim you file — a burst pipe, a break-in, a kitchen fire. Hurricane, hail and earthquake damage triggers a different deductible, written as a percentage of the amount your home is insured for.

A 5% deductible on a $10,000 claim is not $500. With $400,000 in dwelling coverage, 5% is $20,000, so that claim pays you nothing and you cover the repair yourself.

To find your own number, multiply your dwelling coverage limit by the percentage on your declarations page, and do it before hurricane season starts. The Insurance Information Institute reports the ranges below.

How much does a higher deductible lower your premium? Calculating your sweet spot

Higher deductibles mean lower premiums. Carrying a deductible of $2,500 to $5,000 on a home, condo or mobile home policy can save 10% to 20% on your premium, says Earl Jones, owner of Earl L. Jones Insurance Agency. That discount lands every year, while the deductible costs you only in the years you file a claim.

“If you’re trying to save money upfront and can fix much of the damage to your house yourself, stick with a higher deductible,” says Seth Lytton, chief operating officer at The Detroit Bureau.

Subtract the higher-deductible premium from what you pay now, then multiply by the number of years you have gone without filing a claim. If that total beats the extra you would owe on one claim, the higher deductible is worth taking. 

How to choose your deductible

Insurers typically let homeowners choose their own deductible level. Before you settle on a particular number, answer these questions:

1. How much cash do I have? You don’t want to find yourself charging a repair to a high-interest credit card. Make sure you have enough liquid assets to cover the deductible.
2. Am I ok making small repairs myself? Filing claims for minor damage doesn’t make sense if you have a high deductible. You aren’t likely to receive much, if any, money from your insurance company, and the claim could result in higher premiums in the future.
3. Do I live in a disaster-prone area? You could have two deductibles – one for damage related to wind, hail or hurricanes and another for all other damage. If you have a disaster deductible that is a percentage, do the math to see how much you might have to pay out-of-pocket.

Set your flat deductible at the highest amount you could pay tomorrow with your emergency fund still intact, which puts most homeowners at $1,000 or $2,500. Go to $5,000 only if paying it wouldn’t touch the money covering your mortgage and groceries. If your policy also carries a percentage deductible, plan around that number instead, since it’s the larger one and it’s the one you’ll face in the storm that takes your roof. 

Once you have your number, compare what carriers charge for it. Different companies offer different rates, so shopping around will help you find the best price.

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