What is a Deductible?

A deductible is the amount of cash a homeowner must pay out of pocket before the insurance coverage on a claim kicks in.

A Longer Definition: Deductible

In homeowners insurance, a deductible is the non-reimbursable cash that a homeowner agrees to pay for their home’s repair or replacement after a covered loss, such as damage from a natural disaster or theft.

It’s the amount of money an insurance company withholds when paying a homeowner’s insurance claim.

Imagine a tree crashes through your roof. A roofing repair company assesses the damage at $1,000 and you file a claim with your insurance company.

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

Insurance deductibles are meant to reduce moral hazards, such as a homeowner deciding not to install smoke alarms because “insurance will pay for the damage” or not installing a home security system because “insurance will pay for anything stolen.”

Consider your financial situation before choosing your deductible.

High-deductible plans might be more economical for buyers whose savings can pay for large, out-of-pocket costs in an emergency. Low-deductible plans might be more suitable for buyers who prefer additional financial protection.

Deductible: A Real World Example

First-Time Home Buyer Stories: Insurance Deductible

Imagine a first-time home buyer whose homeowners insurance policy has a $1,000 deductible. After a severe storm, it’s found that the home’s roof sustained a large amount of damage, with shingles torn away and punctured areas.

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

An insurance adjuster visits the home to assess the damage, and estimates the roofing repair costs at $18,000. Under the terms of the homeowner’s insurance policy, the homeowner is responsible for paying $1,000 to the roofing company to repair the damage to the home, while the insurance company pays the remaining costs to repair, up to the policy limits.

How To Choose Your Homeowners Insurance Deductible

Home buyers can customize their insurance deductible size.

Choosing a larger deductible generally results in lower insurance premiums because, when a homeowner chooses a higher deductible, they’re assuming a greater portion of damage or theft risk, which reduces the risk the insurer takes.

Conversely, choosing a lower deductible means the insurer pays more money after a claim, so the cost of being insured is higher.

Here’s a quick guide to choosing your insurance deductible.

$250 Deductible: For home buyers without much savings

When you choose a $250 deductible, your out-of-pocket costs stop at $250.

A $250 deductible is best for home buyers who do not want large, out-of-pocket expenses because of storm damage, theft, or some other covered claim.

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

If you can afford to pay more than $250 out-of-pocket after an accident or a loss, choose a higher deductible amount. Otherwise, choose $250.

$500 Deductible: For home buyers with some money saved up

When you choose a $500 deductible for your homeowners insurance, your out-of-pocket costs to repair, replace, or remedy your home and possessions cap at $500.

A $500 deductible is suitable for home buyers with money in the bank – either in an emergency fund or saved up for something else.

So, if you feel good about your cash savings and can make a $500 payment after accident or loss, choose your insurer’s $500 deductible.

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

Choosing the $1,000 deductible option limits your out-of-pocket costs after an insurance claim to $1,000.

The $1,000 deductible is good for home buyers who earn a healthy income and who have sufficient savings to handle unexpected events, such as car accidents, damage to the home, and the theft of valuables.

Choosing a $1,000 deductible lowers homeowners insurance policy costs considerably. High-deductible insurance costs at least 20 percent less compared to low-deductible policies.

Common Questions About Deductible

What are the reasons to choose a high deductible?

Opting for a high deductible generally leads to lower annual insurance premiums. However, this choice also means you’ll face higher out-of-pocket expenses when you make a claim.

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

Yes, you can change your deductible after purchasing the policy. Remember, though, that changing your deductible will likely change the cost of your insurance premiums and the extent of your coverage.

Does choosing a higher deductible always lead to lower premiums?

Most of the time, yes. A higher deductible usually results in lower insurance premiums because it means the homeowner assumes a larger share of the financial 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 every time a claim is 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 might be right for you if you’re comfortable with higher out-of-pocket expenses to save on annual premiums. A lower deductible could be a better option if you prefer lower immediate costs in case of 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 recklessly because they have insurance coverage. This behavior can increase the risk and frequency of claims, so insurance companies often set deductibles and premiums to encourage responsible behavior and mitigate moral hazard risks.