Is it better to have a high or low deductible for home insurance

Did you know you can shave hundreds of dollars off your annual homeowner’s insurance bill by increasing your deductible? We don’t just mean going from $500 to $1,000. Think big. $2,500. Already have a $2,500 deductible? Then think bigger. $5,000. $10,000. Or really big. Like $100,000.

“We have clients with deductibles of $100,000 fairly routinely on $5 million homes,” says Mary Boyd, senior vice president and chief operating officer for ACE Private Risk Services. Some ACE clients with multiple homes and a “significant” net worth have deductibles in the millions of dollars, she says. What do they know that you don’t?

When you choose a deductible, you’re picking a number you’re willing to spend out of pocket if you suffer a loss. It should certainly cover what you think of as run-of-the-mill outlays (when calling the insurer would be more of a hassle than writing a check to the repairman). But if you’re comfortable with laying out even more at the time of a loss, over time you can really save money on premiums.

Choosing a low deductible is “a characteristic mistake,” says Jack M. Guttentag, a professor emeritus at the Wharton School of the University of Pennsylvania who runs MortgageProfessor.com. “What you want is coverage for the risks that you can’t pay for yourself,” he says. (A pine tree bisects your living room; a major electrical fire takes out your gourmet kitchen). Pick the number you’re willing to spend out of pocket based on your resources--how much money you have coming in in income and how much money you have in the bank.

How much might you save with a bigger deductible? On a house insured for $1 million with a $2,500 deductible, a homeowner could save $1,000 a year by going to a $10,000 deductible at ACE (the premium and savings will vary depending on the house’s location and other factors). Since the homes ACE insures typically suffer a loss about once every 20 years, this is a very good bet, says Boyd.

Ted Mitchell, a senior public relations specialist with MetLife Auto & Home says MetLife has seen a trend toward consumers choosing higher deductibles in recent years. While a typical homeowner’s insurance policy deductible is $500 or $1,000, MetLife offers flat dollar deductibles of up to $10,000 (except in Texas which has percentage deductibles). But you don’t have to go to the max for the savings to kick in. In one example, on a coastal Virginia house insured by MetLife for $1 million with a $1,000 deductible, a homeowner could save $300 a year by going to a $2,500 deductible or $600 a year by going to a $5,000 deductible.

To help minimize the chance (and severity) of a loss and your out-of-pocket tab for a high deductible, Boyd says homeowners should install the usual burglar and fire alarms but also consider installing more high-tech safety measures such as automatic leak detectors, battery backup systems for sump pumps, and lightning protection systems. You get additional credits on your premium for these efforts.

Your agent might use the savings opportunity to sell you other insurance, and that can make sense and still put you ahead of where you were before making the deductible changes. What if you have expensive jewelry? The ACE homeowner’s policy covers up to $10,000 in jewelry with a maximum of $5,000 for a single item—subject to your deductible. That means if you chose a $10,000 deductible and lost a bracelet and earrings worth $10,000, there would be no reimbursement. So you might want to consider insuring jewelry (and fine arts or other collectibles) under a valuables policy as an add-on to your homeowner’s policy. With a valuable policy, no deductible applies in the event of a loss.

There are a few steps to buying a homeowners insurance policy. After you choose your homeowners insurance coverages, you will need to choose a policy deductible, which is what you are responsible for paying after you file a claim. That’s why it’s important to choose a deductible that you can afford to pay out of pocket, just in case you’re stuck filing a claim.

That said, a higher deductible typically results in lower premium costs, but comes with higher costs out of pocket if you make a claim. A lower deductible, on the other hand, will typically raise your premium, but it means you have a smaller amount to pay if you find yourself in a situation where you have to make a homeowners claim. So, what exactly is a deductible and how can you know if you are selecting the right one? This guide will walk you through what you need to know to choose the right home insurance deductible.

What is an insurance deductible?

An insurance deductible is the amount of money you are responsible for paying out of pocket if you make a claim. Do not confuse this with insurance premiums, which is the fee you pay an insurance company to provide you coverage.

In general, there is an inverse relationship between premiums and deductibles. The higher your deductible, the lower your premium will be. Similarly, the lower your deductible, the higher your premium will be.

How do homeowners insurance deductibles work?

Let’s say your roof suffered damage from an incident that cost $10,000 in repairs. If the incident that caused the damage is covered under your homeowners insurance policy, your property insurer will help cover the repair costs. In this example, if your homeowners insurance deductible is $1,000, your insurer would cover $9,000 in costs, and you would cover the remaining $1,000 out of pocket.

Types of homeowners insurance deductibles

There are two main types of homeowners insurance deductibles. These will be defined in the policy:

• Dollar-amount deductible: A dollar-amount deductible will define a specific dollar amount that you must pay out of pocket in a claim situation. In the roofing example above, we used a dollar-amount deductible of $1,000.
• Percentage-based deductible: A percentage-based deductible will define a specific percentage of your home’s insured value (coverage A) to be the deductible. Let us say your policy defines a 2 percent deductible and your dwelling coverage is $150,000. In the event of a claim, your deductible will be 2 percent of $150,000 or $3,000.

Keep in mind, you may have more than one deductible for the same policy. For example, you may have a dollar-amount deductible for all claims except for hurricanes or named storms. For those claims, you may have a separate percentage-based deductible. Make sure you understand how to read your home insurance policy to know the types of homeowners insurance deductibles that apply to your policy.

How to choose a homeowners insurance deductible

Choosing a homeowners insurance deductible is part of applying for coverage. Not only should you know what annual premium you can afford, but you should also know what deductible amount you can afford. Follow these steps to choose a homeowners insurance deductible:

1. Think about what deductible you can reasonably afford if you must file an insurance claim

Consider your budget and whether you have emergency savings to help cover things like unexpected insurance deductibles. The deductible you select should not be so high that it creates a financial hardship for you if you have to pay it.

If you determine that you can reasonably afford a deductible of $1000 if you file a claim, tell your insurance agent so they can quote your premium and deductible appropriately.

Learn more: Affordable home insurance companies

2. Determine your comfort level with risk

Some homeowners are willing to take a bigger financial risk to pay a lower annual premium, in hopes that they will not need to file a claim. This means they have a lower annual premium but will be responsible for a higher deductible if a claim is made. Others may be more risk-averse and are willing to pay a higher annual premium to avoid a larger deductible all at once if a claim must be made.

3. Find out how your insurer manages deductibles

The insurance company will typically have you pay your deductible amount to the contractor working on your home. The company will then pay the contractor directly for the remainder of the damage costs, up to your policy limit. In rare cases, though, the insurance company may expect you to pay your deductible up front. Ask the company about their claims payment process so you understand it before you file a claim.

4. Weigh the cost difference if you change the deductible amount

Remember that to get a lower deductible, you must pay a higher premium and vice versa. Get home insurance quotes based on different deductibles to find the “sweet spot” between premiums and a deductible you can afford.

We spoke directly with a State Farm office to get some real numbers to illustrate how the deductible affects the premium and vice versa. These numbers are based in Kentucky and will vary by state.

Let us say you are insuring a home for $150,000. If you select a dollar-amount deductible of $1,000, your annual premium will be around $850. If you select a deductible of $2,000, your annual premium will be around $780. Notice that as you assumed more risk by accepting a higher deductible, your annual premium decreases. Insurance companies like State Farm often offer deductible options as high as $5,000.

As a homeowner and steward of your financial well-being, you have to decide which is right for you. Whatever you decide, remember that homeowners insurance premiums and homeowners insurance deductibles are directly interrelated but are two separate costs and are both necessary costs in maintaining homeowners insurance.

When you get quotes, talk to your chosen insurance provider about its deductible insurance options so you can look at the specifics of how much you pay for your premium and how much you would pay if you need to file a claim. Getting a quote can help make your decision a little easier because you can look at your budget and savings to determine the right deductible for you.

Learn more: Average cost of homeowners insurance

Frequently asked questions about deductibles

Is it better to have a high deductible for home insurance?

What is a reasonable deductible for homeowners insurance?

Are higher deductibles worth it?

Should I choose a higher or lower deductible?