Why You Should Pay Attention to Your Deductibles

You may not have given much thought to the deductibles on your auto and homeowners insurance policies, especially if you haven't filed a claim lately. 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.

Having the appropriate deductible for your situation not only could provide peace of mind but might even save you money.


Deductibles and 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.

For example, increasing the deductible from $200 to $500 on your automobile insurance collision and comprehensive coverage might reduce premium costs by 15% to 30%; selecting a $1,000 deductible could save 40% or more. Raising your homeowners insurance deductible from $500 to $1,000 could save as much as 25% on the annual cost.1

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 20% of the home's replacement value, depending on the region's perceived level of risk and other factors. 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.