A deductible is the amount of money you pay out-of-pocket for a covered claim before your insurance company starts to pay. Think of it as your share of the risk. By agreeing to pay a certain amount first, you're telling the insurance company that you'll handle smaller issues yourself, and they'll step in for the larger ones.
How Does a Deductible Work?
Let's say you have a covered water damage claim that will cost $10,000 to repair, and your homeowners insurance policy has a $1,000 deductible. Here’s how it would work:
- You file a claim: You contact your insurance company to report the damage.
- You pay your deductible: You are responsible for the first $1,000 of the repair costs.
- Your insurance pays the rest: Once you've paid your deductible, your insurance company will cover the remaining $9,000.
It's important to remember that you don't pay your deductible to the insurance company. It's simply the amount that's subtracted from your total claim payment.
Common deductible amounts
Deductibles can vary widely, but for homeowners insurance, they typically range from $500 to $2,500. Some policies, especially in areas prone to specific types of disasters like hurricanes or earthquakes, may have percentage deductibles. This means your deductible is a percentage of your home's insured value, which can make your deductible might be higher than you think.
Want to know your exact deductible? Upload your declarations page and we'll show you what you'd pay out-of-pocket for different types of claims. Upload your declarations page for a free analysis.
How Deductibles Affect Your Premium
There's a direct relationship between your deductible and your premium (the amount you pay for your policy). Generally:
- Higher Deductible = Lower Premium: If you agree to take on more financial responsibility in the event of a claim, the insurance company will reward you with a lower premium.
- Lower Deductible = Higher Premium: If you want the insurance company to cover more of the cost, you'll pay a higher premium.
According to the Insurance Information Institute, choosing a higher deductible can reduce your premium by 15-30%.
Choosing the Right Deductible
Choosing the right deductible is a balancing act. A lower deductible means you'll pay less out-of-pocket if you have a claim, but you'll have a higher premium. A higher deductible will save you money on your premium, but you'll need to have enough cash on hand to cover the deductible if something happens.
When deciding whether to file, consider your emergency fund and how much you could comfortably pay without causing financial hardship. It's a personal decision that depends on your financial situation and risk tolerance.