Understanding the role deductibles play in an auto and/or a homeowners insurance policy is an important part of getting the most out of an insurance policy.
A deductible is basically the amount of money that a policyholder pays out of pocket in the event of a claim before the insurance policy begins to pay out.
A deductible can be either a specific dollar amount or a percentage of the total limits of the insurance policy. Generally speaking, the larger the deductible, the less a consumer pays in premiums for an insurance policy.
With a policy that has a $500 standard deductible, for example, the policyholder must pay the first $500 of the claim out of pocket. But percentage deductibles are based on the home’s insured value. So if a house is insured for $100,000 and has a 2 percent deductible, the first $2,000 of a claim must be paid out of the policyholder’s pocket.
Deductibles have been an essential part of the insurance contract for many years. They represent a sharing of the risk between the insurance company and the policyholder.
In hurricane-prone parts of the country, where there is a greater risk for a major catastrophe, homeowners insurance deductibles are generally higher in cases when the cause of damage is attributable to a hurricane. This typically takes the form of a specific hurricane deductible that is a fixed percentage of the policy limits rather than the fixed dollar amount that applies to non-hurricane claims.
Hurricane deductibles have helped to make more private insurance coverage available in coastal communities at a lower price. This means more choice for consumers. So, consumers who reside in states where competitive markets exist can often shop around for coverage and usually find that they have a selection of insurance policies to pick from, which offer a variety of different premiums, coverages and deductibles.
Here are some important things to know about deductibles:
Raising a Deductible Can Save Money
One of the best ways to save money on a home or auto insurance policy is to raise the policy’s deductible. For example, for auto insurance, increasing the dollar deductible from $200 to $500 can reduce collision and comprehensive coverage premium costs by 15 to 30 percent. Going to a $1,000 deductible can save you 40 percent or more. But, before choosing a higher deductible, be sure you have enough money set aside to pay the deductible outright if you have a claim.
Deductibles Differ by Company and by State
Insurance is state regulated. And insurance companies must follow strict state laws. This also applies to the way deductibles are incorporated into the language of a policy, and how they are implemented. In many states a range of deductibles can be found. So if you are shopping for insurance, you should always ask about deductibles when comparing policies. For homeowners or renters insurance policies, most insurers offer a minimum $500 dollar deductible. However, raising a deductible to $1,000 or more can save upwards of 20 percent on the cost of an insurance policy.
Deductibles Do not Apply to Liability Claims
There are generally no deductibles for the liability portion of a homeowners or auto insurance policy. Instead, the deductibles apply to property damage. So, on in auto policy, there is a deductible for the optional comprehensive or collision coverage, but not for the liability portion. And, in a homeowners policy, deductibles apply to damage to the structure of the house or personal possessions but not if a homeowner is sued or a medical claim is made by someone injured in the home.
Percentage Deductibles Apply to Earthquakes, Hurricanes and Hail
- Earthquakes: Deductibles for earthquake coverage can range anywhere from 2 percent to 20 percent of the replacement value of the structure. Insurers in states like Washington, Nevada and Utah, with higher than average risk of earthquakes, often set minimum deductibles at around 10 percent. In most cases, consumers can get higher deductibles to save money on earthquake premiums.
- California residents also can purchase earthquake insurance through the California Earthquake Authority (CEA). The standard CEA policy includes a deductible that is 15 percent of the replacement cost of the home. The basic policy covers only the house (other structures such as garages, pools, etc. are not covered). Personal possessions are covered up to $5,000 and “loss of use” expenses, the additional cost of living elsewhere while repairs are made to the home, are covered up to $1,500. Recognizing that some people want more comprehensive coverage, the CEA also offers a 10 percent deductible for other structures, personal items coverage up to $100,000 and $15,000 in “loss of use” coverage.
- Hurricanes and Hail: There are two kinds of wind damage deductibles: hurricane deductibles, which apply to damage solely from hurricanes, and windstorm or wind/hail deductibles, which apply to any kind of wind damage.
- Whether a hurricane deductible applies to a claim depends on the specific “trigger” selected by the insurance company. These triggers vary by state and insurer and usually apply when the National Weather Service (NWS) officially names a tropical storm, declares a hurricane watch or warning, or defines a hurricane’s intensity in terms of wind speed. Due to these differences, homeowners should check their policies and speak to their agent or insurance company to learn exactly how their particular hurricane deductible works. In some states, policyholders have the option of paying a higher premium in return for a traditional dollar deductible. However, in high-risk coastal areas insurers may not offer this option, instead making the percentage deductible mandatory.
- Hurricane Deductibles Are Not New: The first hurricane deductibles were introduced into policies over 20 years ago. After Hurricane Hugo hit South Carolina in 1989 and Hurricane Andrew hit Florida in 1992, insurers realized they were far more vulnerable to huge weather-related losses than they had previously thought. In order to be able to continue getting reinsurance (basically insurance for insurers), and thus continue to offer homeowners insurance in high-risk areas it became necessary to require policyholders to share some of the cost by including hurricane deductibles in policies.
Consider Percentage Deductibles When Purchasing a Home
When looking for a new home, it is important to consider the cost of insurance. Coastal properties and other locations at higher risk for a natural disaster may cost more to insure than other locations, and you must add to that a separate deductible for earthquake or hurricane damage. Remember, you will be paying for insurance the entire time you live in your home—if you are a prospective buyer and feel you cannot afford the insurance, then it may be time to consider a different home.
