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How to Decide on a Home Insurance Deductible

on 8 Jun, 2019

The average cost of home insurance premiums in Canada is $840. These prices, however, vary across provinces.

For instance, British Columbia has the highest premiums at $924 annually while Quebec features the lowest premiums at $768 annually. 

While the amount of home insurance you need depends on your specific conditions, the amount you pay is influenced a lot by your home insurance deductibles.

Your deductibles play a critical role in your homeowner’s policy as they not only affect the cost of your policy but also how much your insurer will pay you when you file for a claim.

Usually, the more you pay in home insurance deductibles, the less you will pay in premiums.

However, before you go raising your deductible, keep in mind that a higher deductible suggests that you could get a potentially lower payout in the event of a peril.

Therefore, it is essential to understand the tradeoff you will be making when choosing your deductibles.

In this guide, we’ll explain everything you need to know about a home insurance deductible and how to decide on one.

What is a Home Insurance Deductible?

This refers to the amount that you as a homeowner needs to contribute towards a claim before your insurance company can step in and pay the rest.

For example, let us say you settled on a $600 deductible for your home insurance policy.

If damage worth $590 occurs to your property, your insurer is not going to pay anything since your claim is smaller than your deductible. Thus, you shouldn’t even file a claim.

However, if your home suffers much larger damage, things are a little different. For instance, if it takes $2,000 to fix the damage, you will still have to pay your $600 but your insurer will cover the rest of the $1,400.

Your homeowner’s insurance deductible is also referred to as an all-peril deductible. This is because it applies to most property claims that you can make with the insurance company such as fire, theft, or busted pipes.

However, home insurance claims that go against your liability coverage do not usually come with a deductible.

Types of Home Insurance Deductibles

There are three primary types of homeowner’s policy deductibles. They include:

1. Dollar Amount

In this category, your deductible is a specific dollar sum that you have agreed upon with your insurer. In case of a peril, you need to pay that amount before your policy provider can step in to pay the rest.

For example, if your dollar amount is $500 and the damage takes $1,200 to fix, you will have to pay that $500 out-of-pocket before the insurer can provide you with the remaining $700.

2. Percentage

In this option, the deductible is a percentage of the overall amount of coverage that your policy provides you with.

For example, if your house is insured for $250,000 and your deductible is 2 percent, you will have to pay the first $5,000 if any claim (2 percent of $250,000 = $5,000).

3. A Split

This is a combination of the above options. While the dollar amount is applicable to most claims, the percentage deductible is usually specific to certain events such as earthquakes and hurricanes.

When Are Home Insurance Deductibles Applicable?

It is important to understand that home and auto insurance deductibles work differently to those of health plans.

Typically, your health insurance has a yearly deductible. Once you reach its threshold, the insurance company usually pays for anything else that year.

However, when it comes to home and auto insurance, deductibles are usually specific to any claim, no matter the number of claims you make that year.

Thus, if you reside in an area that is especially prone to recurring risks, you will find yourself going to the bank all too often in order to finance your deductibles.

Deductibles for Areas of Special Risks

If you live in an area that is susceptible to ‘special’ or recurring risks, an insurance company is going to take certain measures to protect themselves from the huge claims that are likely to arise following those disasters.

One way they do this is by imposing high deductibles that are specific to those risks. For example:

• Earthquakes

If you reside in an area where earthquakes are fairly common, an insurer always assumes that a serious one is looming.

As such, earthquakes are not typically covered by standard home insurance policies. To obtain coverage against earthquakes, homeowners often have to purchase a separate policy.

One portion of the policy is for the house while the other covers personal property. There is a deductible and limit allocated to each portion.

For instance, if your home gets destroyed by an earthquake and you have $200,000 worth of housing coverage with a structure deductible of 20 percent, you will need to pay $40,000. The insurer, therefore, will pay you $160,000.

If you have a personal property limit worth $60,000 with a 10 percent deductible and you claim the full amount, the insurer will deduct $6,000 from your settlement.

• Flooding, Hurricanes, Hail

The earthquake deductible situation is similar to these perils as well. For instance, a hurricane deductible is only applicable to damage resulting from hurricanes. Wind and hail deductibles generally apply to damage resulting from any kind of winds.

Nonetheless, since a hurricane is a type of wind, it will depend on how the National Weather Service designates it.

Flooding is also not covered by standard home insurance policies, therefore, you will need to ask your home insurance company how it goes about covering this peril.

Raising Your Deductible to Save on Homeowners Insurance

When you look at it from an insurer’s perspective, a deductible is desirable since it allows the company to cut down on the number of small claims that it would have had to process.

Moreover, a deductible lowers the total overall payout on major claims.

As such, by raising your deductible, an insurer feels that their risk has been significantly lowered.

This is what allows them to lower your premiums. Nonetheless, this depends on your insurance carrier as well as the kind of coverage you have.

Majority of insurance companies have a minimum deductible that you must have. However, they allow you to lower your premiums if you agree to raise your deductible.

You should consider doing this if it is unlikely that you are going to make a claim. This will depend on the likelihood of certain perils happening.

If you live in a place that is not susceptible to theft or natural disasters, then raising your deductible is a good idea.

However, you should make a point of having savings that can finance that deductible in the event that you suffer damage or loss.

Getting the Most Appropriate Homeowners Deductible for You

Making an informed decision regarding your deductibles is only going to be possible if you understand that you are looking at a trade-off.

Raising your deductibles so as to get lower premiums means that your insurer is selling back to you some of the inherent risks that come with homeownership. The following financial situations can help you make the best decision.

• You Are Financially Well Off

For someone who has some change to spare, it does not usually matter if they pay lower premiums for high deductibles or vice versa. This is because they can comfortably afford either scenario.

If this is the case with you, then your choice of deductibles comes down to mathematics.

You will need to do analysis to determine how much the lower premiums can save you against your assessment of the likelihood that you may have to make a claim and pay the high deductible.

• You Have Financial Struggles

Individuals that do not have a lot to spare need to do a lot more research. This is because even though they desire to get lower premiums, it is likely that they will also struggle to get the high deductible in the event of a peril.

As mentioned earlier, you will need to look into the likelihood of a peril happening.

If your area is prone to certain risks, then it is advisable to choose lower deductibles and higher premiums. This will give you the best chance of recovery in case of an emergency.

On the other hand, you can opt for higher deductibles and employ disaster prevention programs to your home such as fire prevention.

• You Are Financially Stable but Not Well Off

This applies to the middle class. Your choice of deductible will depend on how much you can afford to pay out of pocket.

Deductibles and Claims

Higher deductibles affect your claims in two main ways. For one, it allows you to get lower premiums. Second, and perhaps most importantly, it ensures that you do not keep making small claims to the insurer as it covers them itself.

This is because when evaluating how much you should pay in premiums, insurers will look at your risk level.

A major indicator of risk is your record of making claims. If you have made claims in the past, it is more than likely that you are going to do so in the future.

As such, you will be perceived as a high risk, thus getting your premiums raised.

The kind of home insurance deductible you go for will be determined by the specific conditions around you. Use this guide as a resource when making that decision.

The kind of insurer you have will also determine the rates you pay, with some being more favorable than others.

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