When you buy homeowner's coverage, the insurance company commits to covering some -- but not all -- of your costs if you make an approved claim. You commit to sharing some of these costs by agreeing to pay a deductible. Deductibles can be fixed or percentage costs, or a mix of the two. They affect the amount of money you pay for claims and premiums, so it is important to set them at the right level.
How Deductibles Work
If an insurance company agrees to pay a claim, it subtracts your deductible from the total value of the claim. For example, if you have a $1,000 deductible and file a claim for $5,000, the insurance company pays $4,000 of the bill; you have to cover the remaining $1,000. Your deductible may also affect your decision to file a claim or not -- there's no point filing a claim if your costs are lower than your deductible as you'll have to pay out of pocket in that situation anyway.
Types of Deductibles
Dollar deductibles are a fixed amount of money, such as $500 or $1,000. Percentage deductibles are set at a percentage of the value of your property, which might total 1 or 2 percent. Unlike dollar deductibles, percentage deductibles may change. For example, they increase if your home’s value rises.
Some insurance companies allow you to choose the deductible you use; others don't. Sometimes, you have both types in your coverage. For example, you may have a dollar deductible for your regular homeowner's insurance and a percentage deductible for coverage for catastrophic events, such as hurricanes and earthquakes.
How Deductibles Affect Premiums
There is a direct connection between deductibles and premium costs. Typically, insurance premiums cost less if you have a higher deductible and more if you take a lower one. In homeowner's insurance, this may make policies with dollar deductibles more expensive than ones with higher value percentage rates. In either case, you may save money on your coverage if you can afford to raise your deductible.
Choosing a Deductible Amount
Your main consideration with deductible amounts should be affordability. You have to find this money if you file a claim. If you have a choice between dollar and percentage rates, compare their costs. For example, you may be able to cover a $1,000 fixed deductible; if you take a 2 percent deductible on a property worth $250,000, you'd be liable for $5,000. In some areas with a high risk of catastrophic events like hurricanes, you may have no choice but to accept a mandatory minimum deductible to get coverage.