Have You Checked Your Deductibles Lately?

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 then. If so, it might be worth re-evaluating them. Having the appropriate deductible for your situation not only could provide peace of mind but might save you money.

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Acceptable Risk

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 that the insurer and the insured agree to share the risk according to a predetermined formula.

It’s important for you to be comfortable with the financial risk that each deductible represents. But it’s also important that you balance the risk and the upfront cost of your premium.

Higher Deductibles, Lower Premiums

Most policyholders do not 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 that you could not afford to pay on your own.

You may want to calculate how much you would 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 homeowners 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 incident such as an accident, theft, or fire.

Percentage Deductibles

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 is not covered by your homeowners 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. (Some standard policies also may have this feature.) 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.1-2 A basic policy covers only the house, but more comprehensive coverage that includes other structures may be available for a higher cost.

Keep in mind that 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.