What Is a Homeowners Insurance Deductible
You pay monthly premiums to maintain coverage on your homeowners insurance policy. When a covered peril damages your home or belongings, you file a claim with the insurer. Your homeowners insurance deductible is the cost you pay before your insurance coverage kicks in. When choosing a deductible, know that it will affect the price you pay for premiums. Higher deductibles mean lower premiums while lower deductibles mean higher premiums. Insurance companies also place special deductibles for specific natural disasters in certain states.
What Is a Homeowners Deductible and How Does it Work?
A homeowners insurance deductible is the amount you must pay before your insurer covers your home repairs. Deductibles are not the same as premiums, which are monthly fees used to maintain insurance coverage.
Damages should exceed the deductible for a homeowner to claim coverage. For example, suppose an electrical fire causes $4,000 worth of damages to your home. If your insurance deductible is $500, you must pay this amount before your carrier covers the remaining repairs worth $3,500.
What happens if your repairs are lower than your deductible amount? It makes no sense to file a claim in this situation. For instance, if your structural damages are $500 and your deductible is $500, your insurer won't need to pay the claim. You'll have to take care of the expenses on your own.
As a general rule, avoid filing a claim if you can take care of costs out of pocket. Too many claims can cause an insurer to drop you, and your homeowners insurance rate will go up after a claim.
When Do You Pay the Deductible for Homeowners Insurance?
You'll pay your deductible after the insurance company approves your claim and you agree to your carrier's settlement offer. You don't pay your deductible like a bill. Instead, your insurer will subtract the claim amount. If your claim is $15,000 and you have a $2,000 deductible, you'll receive a $13,000 claim check from the insurance company.
Types Of Homeowners Insurance Deductibles
Homeowners insurance deductibles fall into three categories: standard, percentage or split (hybrid).
Standard Deductible (Fixed)
A standard deductible is a set dollar amount you must pay out of pocket for a covered loss. This type of deductible remains fixed and typically ranges between $500 to $2,500. You'll pay the same amount regardless of whether your total damages are $5,000 or $50,000. This flat deductible is the most common type of homeowners insurance deductible.
The percentage deductible is usually for disaster claims, such as hurricanes, hail and windstorm damage. Insurers calculate this type of deductible as a percentage of your home's total insured value, which usually ranges between 1% to 10%.
If you have a 1% deductible, you'll pay $5,000 out of pocket for a home valued at $500,000. If a severe storm causes $20,000 of covered damages to your home, you'll only receive a settlement check of $15,000 from your home insurer, minus the $5,000 deductible you owe.
Split (Hybrid) Deductibles
The split (hybrid) deductible combines both the standard and percentage types of deductibles. An insurer uses a standard, fixed-dollar deductible for damages from common perils, such as fire, smoke and water damage. The carrier may switch to a percentage-based model for other disasters which require a special deductible, like hailstorms, hurricanes or tornadoes.
What Are Disaster Deductibles?
Standard homeowners insurance policies usually cover damages like wind, hail and hurricane damage. Some states may require a special percentage deductible for natural disasters because they occur frequently.
Carriers consider the following circumstances when mandating disaster deductibles:
Your home's location
A federally declared disaster has damaged the area
The region is a high-risk zone
Earthquake insurance is separate from a homeowners insurance policy. This standalone policy carries a deductible that may range from 2% to 20% of your home's replacement value. According to the Insurance Information Institute, this coverage only pays for structural or foundation damage directly caused by an earthquake.
In the United States, standard homeowners insurance and business insurance policies don't cover damages from quakes, mudslides or sinkholes. Home insurance policies only pay for indirect problems resulting from tremors, such as fires from downed power lines or water damage from burst pipes. Comprehensive auto insurance covers any earthquake damages to vehicles.
The California Earthquake Authority offers earthquake insurance to Golden State residents with deductibles of 15% of a home's insured value. The organization also provides "Homeowners Choice" earthquake policies that allow residents to select deductibles ranging from 5% to 25% of their dwelling and personal property coverage.
Currently, only 19 states have mandated hurricane deductibles on homeowners insurance coverage, including:
- New Jersey
- New York
- North Carolina
- Rhode Island
- South Carolina
- District of Columbia
Hurricane deductibles only apply to damages from storms named and categorized by the National Weather Service (NWS) or the National Hurricane Center. Typical deductibles range from 1% to 5% of the home's insured value.
According to the Insurance Information Institute, carriers began using hurricane deductibles in the 2000s after coastal homeowners and insurers hemorrhaged massive losses from these deadly storms. The insurance industry mandated hurricane deductibles in high-risk areas to mitigate financial costs.
A hurricane deductible will apply when the NWS takes the following actions:
Names a tropical storm or hurricane
Announces a hurricane watch or warning
Identifies the storm's intensity
Windstorm deductibles apply to storm damages caused by wind and hail. These deductibles generally range from 1% to 5% of your home's insured value and apply to all wind and hail damages, no matter how they occurred. The National Weather Service doesn't have to name a storm for your insurer to apply for coverage.
Windstorm insurance deductibles are required in 19 states:
- New Jersey
- New York
- North Carolina
- Rhode Island
- South Carolina
Flood Insurance Deductible
Standard homeowners insurance policies don't cover damages from floods. The Federal Emergency Management Agency runs the National Flood Insurance Program, which provides renters, property owners and businesses with coverage for flood damages. In high-risk areas, the federal government requires people with government-backed mortgages to carry flood insurance.
According to FEMA, building and contents policies have separate deductibles. When a flood event damages your property, both deductibles will apply. Flood deductibles typically range from $1,000 to $10,000.
How To Choose Your Homeowners Insurance Deductible
When choosing a homeowners insurance deductible, select it based on your financial situation. Think about how much money you can afford to pay out of pocket before insurance will cover losses.
Here are two scenarios to consider.
A high deductible/ low premium is better for people who can afford to pay a higher deductible and want to pay less in premiums.
If you select this option, make sure you have saved enough money to cover the higher deductible if you have to file an insurance claim.
A low deductible/ high premium is best for individuals that can't afford to pay expensive repair costs on their own.
This is a better choice for new homeowners who may need time to build up an emergency fund for repairs.
Get the Homeowners Insurance Coverage You Need
Homeowners insurance deductibles are an essential part of your home insurance policy. This fee is a shared cost you must pay before your carrier covers damages.
There are three different types of deductibles. Standard deductibles have a flat cost you'll pay no matter how much your claim is. The percentage deductible is specifically used for damages caused by wind, hail and named storms in disaster-prone regions. Insurance policies with split deductibles allow carriers to switch between standard and percentage-based ones, depending on the peril.
The deductible you select can affect your insurance rates. Higher deductibles are best for individuals with enough financial resources to pay a higher deductible upfront. Lower deductibles are better for those who don't have emergency funds to pay a high deductible.
Your home is a precious asset that deserves the best insurance protection. If you are unhappy with your coverage, it may be time to search for a new policy, which may even cost less than what you are paying now. SmartFinancial can help you get a free homeowners insurance quote from local carriers in your area. Enter your zip code below to get started.