A deductible is the amount of money a homeowner must pay out of pocket before the insurance coverage on a claim applies.

Understanding Deductibles

In homeowners insurance, a deductible is the amount of money that a homeowner agrees to pay for home repairs or replacement after a covered loss, such as damage from a natural disaster or theft.

This is the portion of a claim that an insurance company withholds when paying for a homeowner's insurance claim.

How Deductibles Work

For example, imagine a tree crashes through a roof. A roofing repair company assesses the damage at $1,000, and the homeowner files a claim with their insurance company.

• If the deductible is $250, the insurance company sends $750 for repairs.
• If the deductible is $500, the insurance company sends $500 for repairs.
• If the deductible is $1,000, the insurance company sends nothing.

Insurance deductibles are designed to reduce moral hazards, such as a homeowner neglecting to install smoke alarms or a security system because they expect insurance to cover the damage or theft.

Carefully consider your financial situation before choosing a deductible.

High-deductible plans may be more economical for homeowners with savings to cover large out-of-pocket costs in an emergency. Low-deductible plans may be better suited for those who prefer additional financial protection.

Deductible: A Real World Example

Imagine a first-time home buyer with a $1,000 deductible on their homeowners insurance policy. After a severe storm, the home's roof sustains major damage, with shingles torn away and punctured areas.

There are also visible signs of water damage and leaks inside the home.

An insurance adjuster assesses the damage and estimates the roofing repair costs at $18,000. Under the insurance policy, the homeowner must pay $1,000 to the roofing company, while the insurance company covers the remaining costs, up to the policy limits.

How To Choose Your Homeowners Insurance Deductible

Home buyers can select the size of their insurance deductible.

Choosing a higher deductible generally lowers insurance premiums because the homeowner assumes more of the financial risk. This reduces the insurer's risk.

Conversely, choosing a lower deductible means the insurer covers more after a claim, resulting in higher premium costs.

Here's a quick guide to help choose an insurance deductible.

$250 Deductible: For home buyers without much savings

Choosing a $250 deductible limits out-of-pocket expenses to $250.

A $250 deductible is ideal for home buyers who want to avoid large out-of-pocket costs due to storm damage, theft, or another covered claim.

The trade-off: higher monthly premiums. An insurance plan with a $250 deductible may cost about 20 percent more than a higher-deductible plan.

If paying more than $250 after a loss is manageable, consider a higher deductible. Otherwise, stick with $250.

$500 Deductible: For home buyers with some money saved

Choosing a $500 deductible caps out-of-pocket expenses to $500 for repairs or replacements.

A $500 deductible is suitable for home buyers who have savings, either in an emergency fund or set aside for other purposes.

If a $500 payment after an accident or loss is manageable, consider selecting the $500 deductible.

$1,000 Deductible: For home buyers with good income and savings

Choosing a $1,000 deductible limits out-of-pocket costs to $1,000 after a claim.

A $1,000 deductible is good for home buyers with solid incomes and sufficient savings to cover unexpected events, such as home damage or theft.

Higher deductibles can lower the cost of homeowners insurance by at least 20 percent compared to lower-deductible policies.

Common Questions About Deductibles

What are the reasons to choose a high deductible?

Opting for a high deductible often leads to lower annual insurance premiums. However, this choice means higher out-of-pocket expenses when making a claim.

Can I change my deductible after purchasing my homeowners insurance policy?

Yes, it is possible to change your deductible after purchasing the policy. Keep in mind that this will likely affect your insurance premiums and coverage.

Does choosing a higher deductible always lead to lower premiums?

Usually, yes. A higher deductible typically lowers premiums because the homeowner takes on a greater share of the risk in case of a claim.

Do I have to pay my deductible on every claim, or just the first claim?

Deductibles must be paid with every claim made.

How should I determine the right amount for my deductible?

Consider your financial stability and your willingness to take on risk. A higher deductible may suit you if you are comfortable with larger out-of-pocket expenses to save on annual premiums. A lower deductible may be better if you prefer lower costs when making a claim.

How does the concept of moral hazard relate to homeowners insurance?

Moral hazard in homeowners insurance refers to the increased likelihood of a policyholder acting carelessly because they have insurance coverage. To mitigate this risk, insurance companies use deductibles and premiums to encourage responsible behavior.