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You cannot buy home insurance without hearing the term “deductible”. Despite its widespread use within the industry, you may find out that most customers are clueless about the real meaning of this term. People tend to understand the significance of deductibles in theory. However, only after going through a bad situation, they become aware of deductibles’ importance. Lack of knowledge about the essence of deductibles can result in financial losses in case of any disaster. A deductible represents the sum of money a homeowner needs to pay out of his/her own pocket before receiving payment from an insurance company.
It is crucial to get acquainted with the process of calculating home insurance deductibles and its impact on your monthly premiums and the whole budget. Knowing all those complicated concepts of the insurance sector and applying them to your family’s finances will help you find the optimal insurance policy and save tons of money.
Home Insurance Deductible Explained
In order to give you a better understanding of the concept of deductibles, it is important to describe this phenomenon with an example. Suppose that you have suffered significant damage to your home because of the windstorm and your roof was damaged by falling branches. Let’s assume that you have paid $5,000 for repairs. With a $1,000 deductible amount, you will be required to pay $1,000 personally, and the insurer will cover your additional $4,000 expenses.
It is a common misconception that in case you want to file a claim, you must initially transfer the specified amount of money to your insurer. It is a wrong notion as you do not pay anything directly to the insurance company before starting repairs. What happens next is that the insurer deducts the mentioned sum from your claim and sends you a reimbursement check for the remaining amount. You should transfer your personal payment to your handyman separately.
Two Kinds of Home Insurance Deductibles
All of the insurance deductibles serve similar purposes. However, the difference lies in the calculation methods. There are two principal kinds of deductibles available to you when choosing a homeowners insurance package.
Flat-Dollar Deductibles
The most basic deductible calculation technique is associated with flat-dollar deductibles. All you need to do is to look at your policy’s declaration page and find the specified sum. Typical values of flat-dollar deductibles include $500, $1,000, and $2,500. No matter what happens, the deductible amount will always stay the same for each particular incident.
Percentage Deductibles
Percentage deductibles represent a bit more complex yet easy to understand formula. These types of deductibles can be found among hurricane or tornado zones in America, where natural disasters occur very often. Contrary to flat-dollar deductibles that have a fixed value, a percentage deductible involves multiplying your total dwelling limit by a specified percentage value.
Let’s consider that your dwelling coverage amount equals $300,000, and your insurance program involves a 2% hurricane deductible. When making an insurance claim due to a hurricane, you need to pay a deductible amount equal to 2% of the total dwelling limit, which is $6,000. It does not matter whether the cost of damages equals $10,000 or $100,000, you will still have to pay your initial $6,000 personally. You may note that the sums involved are quite significant and you should be aware of that.
Finding Balance Between Deductibles and Premiums
One of the most critical factors when looking for an appropriate insurance policy is finding the balance between deductibles and premiums. Since they represent the inverse relationship, you have to understand the principle in order to make the right decisions.
As a client, it is essential to be aware of your monthly budget and future savings plans. If you want to make sure that you will pay the same predictable monthly fees, you might want to purchase a policy with a higher deductible amount. If your budget is quite limited and you cannot afford high monthly premiums, it will be more convenient for you to opt for a policy with a low deductible amount.
High Deductibles Help Lower Your Insurance Payments
It goes without saying that the use of deductibles can help you considerably reduce your annual insurance fees. By increasing the deductible sum, you can make a substantial saving, but it depends on whether you have enough money to cover it in case of any emergency. For instance, if your hot water system fails and requires expensive repairs, you should better have your entire deductible saved.
Homeowners Insurance Deductibles Are Incident-Based
Another distinctive characteristic of home insurance deductibles is the fact that they differ significantly from health insurance deductibles. When buying health insurance packages, clients should expect to cover their deductibles every year. From that moment onward, all of their expenses will be covered. Homeowners insurance works a bit differently. In other words, they are incident-based. It implies that you can submit any number of claims throughout the year without an upper limit on deductible expenses.
Summary on Determining Deductible Amount
Homeowners insurance deductibles should not be complicated concepts that discourage you from signing the contract with an insurance company. To find the appropriate insurance package and make it work for you, you need to take into account your budget and emergency funds. If you prefer stable monthly payments with plenty of money in your bank, go with a low deductible insurance package. On the contrary, if you want to save on insurance fees and risk losing some cash on unexpected claims, a higher deductible is the better choice.
FAQ About Deductibles and How to Choose One
Question: What Happens if My Claim Does Not Reach the Required Amount?
Answer: In case your roofer informs you about $800 needed to fix your fence, but your insurance package has a deductible amount of $1,000, your claim will not be processed. Due to the fact that the overall cost of damages is smaller than the deductible amount, you need to make the necessary repairs yourself. You should not submit any requests if they do not exceed your deductible amount as it may negatively affect your loss history.
Question: Will I Be Covered for Total Loss Without Paying a Deductible Amount?
Answer: Under extremely rare circumstances, you can be covered for a total loss regardless of the presence of deductibles in your insurance package. The only conditions when you are fully compensated by your insurer are as follows: the total loss exceeds your maximum coverage amount and your property is destroyed beyond repairs. Moreover, there is a special “large loss deductible waiver” option available to top-tier packages.
Question: Are There Special Deductibles for Personal Items and Liabilities?
Answer: There are no separate deductibles that apply to Personal Property Coverage and Personal Liability Coverage. Normally, your chosen deductible affects Dwelling Coverage and Other Structures Coverage. So, whenever you are sued for a property-related injury, the relevant Personal Liability portion of your coverage comes into play, providing full protection without charging your deductible amount.
Question: Can I Change My Deductible Amount Throughout the Year?
Answer: Changing your insurance deductibles is completely normal and you do not need to wait until your policy is renewed to do that. At any point throughout the year, you can contact your insurance agent via phone or online and ask him or her to modify the terms of the deal. An increase in deductible amount will automatically decrease your monthly payments.