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If you’re looking to trim living expenses associated with your home, one option could be to raise your homeowner’s insurance deductible. Your savings will vary depending on your insurance company, where you live, and other related factors.
It raises an important question of how much insurance you need and what you will tolerate regarding risk. A higher deductible can save money until you need to make a claim. At that point, you’ll need to dig deeper to cover the initial deductible.
How Deductibles Work
A homeowners insurance deductible is how much you pay before the insurer’s coverage kicks in. For example, if you have a $500 deductible and make a claim for $3,000, you’ll pay the first $500, and the insurer will pay the remaining $2500.
However, with a $2,000 deductible, you’ll get stuck with a much bigger bill, and the insurer will pay the remaining $1,000.
Deductibles usually are a fixed dollar amount, but some policies may be calculated based on a percentage or a blended version of the two.
However, if you’re in a place unaffected by devastating natural disasters or high crime, you might consider a higher deductible if your state allows it. Some states heavily regulate homeowners insurance, placing limits on the deductibles.
In those cases, even if you want to save money, you may not be allowed to do it this way.
Savings Add Up Over Time
But if you have that flexibility and are comfortable with the risk, the extra premium savings can go for several other uses. You can pay down your outstanding loan balance quicker.
Invest the savings in home improvements to raise your property’s value, or use it for an upcoming major expense like college tuition. Remember that annual savings, whether $500 or more, are compounded over time to produce a nice return.
Think of it this way. If you can save $500 annually by increasing your deductible to $2,500, if you don’t file a claim during that time and you do file one later, your savings over the years more than fully cover the higher deductible.
Many people are fortunate enough that they may never file a claim, producing huge savings over 20 or 30 years. You’re sacrificing a little peace of mind for a few more dollars in your bank account, and how you decide what that sweet spot is can be challenging.
Also, if you put those savings into a high-yielding investment, you’ll see even greater returns with compounded interest working to your advantage.
Does a Higher Deductible Make Sense For You?
Crunch the numbers to decide exactly what your sweet spot is versus the amount of risk you’re willing to take. One thing to consider is if you’ll always have enough money set aside to cover the larger deductible.
If your budget runs extremely tight, you could put huge pressure on yourself to come up with a big chunk of change at a time when you probably can least afford it.
The numbers need to make sense for your situation. If you find out that raising your deductible by a couple of thousand dollars only results in savings of $100-$200 annually, is that a good risk-reward situation for you? Probably not.
Also, if you live in a place where there’s a greater likelihood that you’ll file a claim, possibly because you live in a tornado or hurricane-prone area, consider that as well.
For example, hurricane insurance in Florida and other Gulf Coast states is an additional cost to a regular homeowner’s insurance policy, with its own deductible. Wind peril is one of the greatest risks in those coastal regions, and this is why a set amount of hurricane insurance is required to help insurers manage their risk.
The same holds true in California for earthquake insurance.
Disaster deductibles are based on a percentage of the property’s insured value, ranging from 1-5% of the insured value. A home valued at $300,000 with a 5 percent hurricane deductible would equate to a $15,000 deductible if a hurricane hit.
Disaster insurance is designed to cover you for those large losses and is not intended to be a maintenance policy.
Other Ways to Save
A higher deductible is only one strategy to save money. You must aggressively shop your policy with multiple insurers or through a broker to see if you can save money that way.
Many offer bundled discounts when you have several kinds of insurance. Bundling your homeowner’s, auto, life, and other types of policies can produce some quality savings.
You can also reduce the risk your insurer views on your home. Installing alarm systems, a more fire-retardant roof, and other risk-reducing moves can impact your premiums.
One of the side effects of a higher deductible is that you’re less likely to file a claim for something that won’t meet the total deductible amount. Part of the reason for this is that an insurer will track claims you make, and when you file several over time, that could make you a higher risk in their eyes.
Good or bad, it’s a forced way to ensure you don’t make small claims.
What Lenders Want
A home lender is more concerned with the type of insurance coverage and the replacement value than the amount of deductibles. Most lenders require insurance to cover replacement value or at least the home’s assessed value.
For example, a mortgage must still be paid if a home is burned to the ground, and insurance should pay to rebuild.
The homeowner’s insurance deductible should be reasonable for the homeowner. A $5,000 deductible for someone who put 3% down on an FHA loan may be questioned by a lender.
In those cases, first-time homebuyers on a tight budget may only want a $500 deductible.
What If You Can’t Pay?
If you raise your deductible but can’t pay it when filing a claim, your insurer may drop you.
Suppose you have a $5,000 deductible. Your insurer will deduct $5,000 from the check it gives you to make repairs, and if you can’t afford to pay that $5,000 from your pocket to help make repairs, you could be dropped by your insurer if the repairs aren’t made.
If they don’t drop you, you could face higher premiums. Not all insurers raise rates after one claim is made, but an insurance company could increase the premium for the next five years until the homeowner shows five years of no claims.