Good insurance coverage can be expensive, so it’s not surprising most people look for ways to save. One often overlooked option is a higher deductible, because it leads to lower premiums without sacrificing coverage.
While this option isn’t always the best solution, it could offer you considerable savings in the correct circumstances. Let’s look at how a higher deductible may benefit you.
What is a Deductible?
The deductible on your insurance policy refers to the money you pay out-of-pocket before the insurer pays out on a claim. The insurance company “deducts” this money from the claim amount.
For instance, you file a claim for $10,000 against your homeowner’s policy, and have a $500 deductible. The insurance company settles the claim and pays you $9,500.
Not all deductibles are straightforward dollar amounts. Some policies calculate your deductible based on a percentage of the value of your home, or a dollar amount for most events and a percentage for others.
How to Determine an Appropriate Amount
Higher deductibles are attractive since they reduce your premiums, but you must be able to afford them. You need savings to pay out-of-pocket if you need to file a claim.
Basically, choose a home insurance deductible that you can reasonably afford. You need to be able to pay the deductible without causing serious financial stress. It should not wipe out your emergency fund, since you may need money if you file a claim. It takes time to receive reimbursement from the insurer and you may need to stay in a hotel and eat in restaurants until your home is repaired or replaced.
Insurers offer savings when you choose a higher deductible, because you’re assuming more risk and you’re less likely to file small claims. This also reduces the chances of premium increases since you’ll file claims less often.
It’s Worthwhile to Minimize Claims
Multiple claims impact insurance premiums, sometimes by as much as 25 percent or more. If you’re in a comfortable financial position and willing to pay for small losses, a higher deductible often makes sense.
Insurers often offer a one-time discount to claims-free customers too. This discount reduces the policy cost between 5 and 20 percent, depending on the insurance company.
Increasing your deductible can substantially impact your annual premium. Here is an example based on a $200,000 policy and increased deductibles calculated by percentages:
Policy Amount Deductible Premium
$200,000 .5% or $1,000 $1,173
$200,000 2% or $4,000 $ 972
$200,000 5% or $10,000 $ 814
In this example, increasing the deductible resulted in savings of up to $359, or over 30 percent. That’s money you can stash away in case you need to file a claim and it’s in your bank account, not the insurance company’s.
If increasing your deductible sounds like something you could comfortably afford, give us a call. The highest deductible doesn’t suit everyone but we can help you find a balance between risk tolerance and deductible amount that works for you and your family.