Save by increasing your homeowners insurance deductible

How much can you save by increasing your homeowners insurance deductible?

You can trim about $260, on average, from your homewners insurance rates by hiking your deductible, but in some cases it can be much more than that. The amount you save on home insurance by increasing your deductible depends on your insurance company, where you live and other factors.

We’ll explain how home insurance deductibles work and the pros and cons of choosing a high deductible, as well as show how much you can save in every state by hiking your deductible on a variety of different policies.

How does a home insurance deductible work?

Homeowner insurance deductibles are the amount you pay when you file a claim before the insurance company kicks in their portion.

Types of home insurance deductibles

Deductible amounts generally fall into three categories and are specified on the declarations page of your policy.

One is a fixed dollar amount, which is the most common. You select an amount, typically from $500 to $2,500. So, for instance, if your deductible is $1,000, and you file a claim for $5,000, you would pay $1,000 and your insurance company would pay $4,000.

The second deductible type is based on a percentage of the policy's total coverage amount. Percentage-based deductibles are usually - but not always - applied to wind and hail damage. For example, if you have a 1 percent deductible for wind and hail damage and dwelling coverage of $200,000 and file a hail damage claim, you will pay $2,000.

The third is a hybrid of the first two and is called a split deductible. If your policy has a split deductible, the fixed dollar amount deductible applies to most perils, but others, like hurricane and earthquake, will have a percentage-based deductible.

What about deductibles for natural disasters?

If you live in an area prone to certain natural disasters, you may be wondering how this will affect your deductible. Here are the most common natural disasters and what they mean for your home insurance deductible:

• Wind and hail: These damages are common in areas prone to tornadoes and straight-line winds. Wind and hail deductibles are typically percentage deductibles.
• Hurricanes: If you live in an area affected by hurricane season, you may be subject to a hurricane deductible if your home is damaged by a National Weather Service designated hurricane. There are 19 states, plus the District of Columbia, that have hurricane deductibles. Like wind and hail deductibles, hurricane deductibles are typically based on a percentage of the total coverage amount.
• Earthquakes: If you live in an area at a high risk of earthquakes, it is important to know that earthquakes are not covered under your standard home insurance policy. In addition to your standard policy, you will need a separate policy or endorsement for earthquake coverage on your dwelling and personal property. Earthquake deductibles are percentage-based.
• Flood: The standard home insurance policy does not include flood coverage. Flood insurance is achieved under a separate policy with a separate deductible. Flood insurance is recommended for people who live in areas prone to flooding. When a flood claim is filed, you will pay a percentage-based deductible.

When do you pay the homeowners insurance deductible?

The home insurance deductible is payable by you only if you file a homeowners insurance claim that gets approved. You will pay the deductible amount toward the repairs and then the insurance company will pay out the rest. If your deductible is $1,000 and you file a $10,000 claim that gets approved, you will pay the $1,000 deductible first and then your insurance company will pay $9,000.

But what if you have multiple things damaged at one time? If the damages sustained are all part of the same incident it will count as one claim and therefore, you will pay the deductible only once for those damages even if multiple things were damaged.

What types of claims does the home insurance deductible apply to?

The homeowners insurance deductible is only applicable to the property coverage portions of your home insurance policy. In addition to property coverages, standard home insurance policies include personal liability coverage and medical payment coverage. However, you will not pay a deductible in liability or medical payment claims.

What is the standard homeowners insurance deductible?

For the dwelling coverage portion of your policy, which covers damage to your home, and the personal property insurance component, which covers possession in your home, you choose a deductible amount. Those amounts vary by insurance company but typically range from $500 to $2,500. Remember, if you have an approved claim, this is the amount you will pay before the insurance company will pay the rest.

How home insurance deductible affects your premium

If you choose a high deductible amount, you can reduce the amount you pay for coverage. In other words, you can reduce your annual premium. That's because insurance companies realize you'll file fewer claims if you have a high deductible. After all, if your house sustains $3,000 worth of damage, you're not likely to file a claim if your deductible is $2,500. If your deductible is $500, there's a greater chance you'll file a claim to get the balance paid by your insurer.

The downside of having a high deductible is that if you file a claim, you will have to pay that high deductible out of pocket. Before you choose a deductible, it is important to ensure you will have that amount of cash-on-hand should you need to file a claim. If it is not typical for you to have this amount of cash-on-hand, raising your homeowners insurance deductible may not be a wise choice. The whole purpose of home insurance is to reduce your financial hardship in the event of damage or destruction.

Still, there's a case to be made for choosing a high deductible to save money. Deductibles are paid only when you file a claim, and the average homeowner makes a claim only once every 10 years, says insurance agent David Shaffer, who has researched insurance company underwriters' studies.

Homeowners insurance claims and deductibles

Shaffer, an independent agent in Walnut Creek, California who helped establish the insurance consumer advocacy group United Policyholders, recommends selecting the highest deductible you can afford. The reason is that most home insurance companies will increase your rates after you file a claim. If you file more than one or two claims in a 10-year period, your premiums are likely to jump, and if you file two in a three-year period they will increase significantly. In some cases, if you file more than one claim under your policy's term, the insurance company will not renew your policy.

So, it makes financial sense to pay for minor damage yourself and not turn to your coverage. An insurance payout for minor damage, say $5,000 or less, isn't going to make up for the increased amount you pay for your policy after filing a claim.

"My message is that consumers need to proactively prevent small losses from happening since they are going to cover them if they do occur, pocket the savings over all of the years they will own a home, and truly view one's home insurance policy as a consumer product to cover major losses," Shaffer says.

Some insurance companies only allow deductibles up to $1,000. In those cases, he recommends shopping for a home insurance policy from a company that allows much higher deductibles.

How much you save in every state for hiking your home insurance deductible

How much can you save by hiking your home insurance deductible? An Insurance.com rate analysis shows homeowners can trim an average of $260 off their rate by jumping to a $2,500 deductible from $500. Homeowners in Florida, who pay the most for home insurance nationwide, save the most in the country ($675). Those in Idaho, the third-cheapest state for home insurance, save the least ($96), according to Insurance.com's analysis.

Enter your state in the search field, or scroll the chart horizontally to the right, and you'll see in the chart below how much you can save by raising your deductible from $500 to $2,500. In addition, you'll see the rates for deductibles of $500, $1,000, $1,500, $2,000 and $2,500 for a policy with the following limits:

• $200,000 in dwelling coverage
• $100,000 in liability

Insurance.com's analysis found that all states realized similar savings to the chart above for a policy with $300,000 in liability coverage, rather than $100,000, the overall average savings was $261. Here are average savings for jumping to a $2,500 deductible from $500 for other various coverage levels:

• $300,000 dwelling/$300,000 liability -- $321
• $400,000 dwelling/$300,000 liability -- $376
• $500,000 dwelling/$300,000 liability -- $419

For more details on how to choose the right deductible for your particular situation, read our guide to selecting home insurance deductibles. Additionally, you can compare rates by ZIP code for 10 coverage levels by using Insurance.com's average home insurance rate tool.

Methodology:

Insurance.com commissioned Quadrant Information Systems to field home insurance rates from up to six major insurers in each state for nearly all ZIP codes in the country for 10coverage levels based on various dwelling and deductible limits.