Homeowners insurance is not quite as simple as paying each month and then, if something bad happens, the insurance company will automatically cover it all. Generally speaking, you’ll still be on the hook for a certain amount of money if and when the time comes to file a claim. That amount is called your homeowners insurance deductible, and you do get some leeway when it comes to choosing it.
Here’s what you need to know about homeowners insurance deductibles and how to decide on an amount that’s right for you.
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What Is a Homeowners Insurance Deductible?
A homeowners insurance deductible is the amount of money you’ll pay out of pocket when you file a claim for damage repair or replacement. In other words, it’s your portion of the responsibility for the expense.
For example, say your home weathers a windstorm and sustains roof damage to the tune of $10,000. If your deductible is $1,000, you’ll pay that much toward covering the repair cost, and the insurance company will pay the remaining $9,000.
Keep in mind that your deductible is distinct from your insurance premium, which is the amount you pay on a monthly, quarterly or annual basis, regardless of whether or not you’re filing a claim, to keep the policy active.
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Types of Homeowners Insurance Deductibles
Homeowners’ insurance deductibles can be calculated in a variety of different ways. The two most common are flat deductibles and percentage deductibles.
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1. Flat Deductible
A flat deductible, as its name suggests, is one that’s charged as a flat fee regardless of the full price of the damage. In our roof damage example above, the flat deductible is $1,000.
Indeed, $1,000 is a pretty standard deductible for those who choose a flat homeowners insurance deductible, though lower deductibles ($500) and higher deductibles ($2,000) are also available. Of course, like any other insurance product, the lower your deductible is, the higher your monthly premiums will be — and vice versa. It’s important (and often challenging!) to strike a balance between ample coverage and affordability.
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2. Percentage Deductible
Percentage deductibles are those that are assessed as a percentage of the total insurance coverage amount on your home.
For example, if your home is covered for up to $350,000 and your deductible is 1%, you’d be on the hook for up to $3,500 if you filed a claim. Percentage deductibles tend to start around 1% and go up to 10% of the total home coverage value. The higher the percentage, the lower your monthly premiums — but consider that even 3% of that $350,000 total is $10,500. Again, it’s a balancing act.
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What Is a Disaster Deductible?
It’s important to bear in mind that standard homeowners insurance policies don’t cover everything. Generally, eligible claims are limited by the named perils in your policy document — perils that include vehicular damage, theft, falling objects, and many other occurrences, but not major disasters like earthquakes, hurricanes and floods.
If you live in an area prone to these events, you’ll likely need to purchase additional insurance coverage specifically in case they occur — and the deductibles for these disasters work a little differently than standard homeowners deductibles do. Always review your insurance paperwork to ensure you know exactly how your policy works, but here are some general rules around what you might expect when it comes to disaster deductibles.
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1. Hurricane deductibles
Hurricane deductibles may be a reality in your life if you live along the Atlantic coast, especially in states like Florida and Louisiana that are very prone to these massive storms.
It’s complicated, though, because most standard homeowners insurance policies do cover some amount of wind and storm damage — so the deductible you’ll be responsible for will depend on how the insurance company assesses and documents the damage. In many cases, hurricane insurance requires policyholders to have a percentage deductible rather than a flat deductible, which could mean higher out-of-pocket expenses if extreme damage occurs.
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2. Wind damage deductibles
Wind damage deductibles may apply to those who live in Tornado Alley and other areas that frequently experience extreme windstorms. Similar to hurricane insurance, most standard homeowners policies do include some wind damage coverage, so your experience will depend on how the damage is coded by the insurer. This type of insurance is another where the deductible is typically paid in a percentage (usually 1%-5% of the total home insurance coverage value).
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3. Flood insurance deductibles
Flood insurance deductibles vary by state and insurance company, and you’ll likely be able to choose between a flat deductible and a percentage deductible.
Even if you don’t think you live in an area that’s particularly prone to floods, you might consider purchasing this additional insurance, which is not included in most standard homeowners policies. According to the Insurance Information Institute, approximately 90% of natural disasters in the United States involve flooding, which can cause catastrophic (and very expensive) damage quickly.
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4. Earthquake insurance deductibles
Earthquake insurance deductibles vary depending on your state and location, but are another that is paid by percentage — a percentage that might be as high as 20% of the replacement value of your home. States with high earthquake risks may set a minimum deductible of 10% of the home replacement value, which is expensive… but a lot less expensive than rebuilding the whole home yourself out-of-pocket, which you might just have to do in the case of a serious earthquake.
Recommended: Is Homeowners Insurance Required to Buy a Home?
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How to Choose the Right Deductible
Now that we’ve covered different homeowners insurance deductibles, we come to the fun (or not-so-fun) part: how do you figure out which type and level to choose?
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Understanding How Your Deductible Affects Your Premium
As with all insurance products, the basic equation comes down to how much you can afford to pay on a regular, ongoing basis versus how much you might be able to afford to pay in the event you need to file a claim.
Higher deductibles mean lower premiums, but more out-of-pocket costs when something goes wrong. On the other hand, higher premiums might be harder to keep up with month to month but mean that in the event of a disaster, you’re more likely to have fuller coverage.
Keep in mind, too, that your home is likely to be your single largest asset; losing it (or seeing its value depreciate steeply) could quickly decimate your overall financial wellness and net worth. For that reason, it’s usually a good idea to opt for fairly substantial homeowners insurance coverages, even if you’re not required to do so by your mortgage lender.
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A homeowners insurance deductible is the amount of money the insured is responsible for in the event that a claim is filed. It’s separate from the premiums the insured party pays to keep the policy active. However, deductibles and premiums are related: generally speaking, the higher the deductible, the lower the premium, and vice versa.
Pretty much all types of insurance hinge on this monetary balancing act — but because of how financially catastrophic certain events can be, it’s usually worth paying overtime to ensure someone’s got your back if disaster strikes.
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