About Catastrophic High Deductible Homeowner's Insurance

Higher deductibles mean less money in premiums.

Catastrophic homeowner's insurance pays money only after the homeowner meets a high deductible. Due to the high deductible amount, homeowners only use this type of insurance for large, catastrophic damage or loss. Examples of catastrophic natural disasters, which often require high deductible homeowners' insurance claims, include earthquakes and floods.

Premiums

Catastrophic high deductible homeowner's insurance comes with a smaller premium price tag than plans with lower deductibles, says financial analyst Glenn Curtis. When trying to save money each month, go with a high deductible plan. Remember, however, you must have the money to pay the large deductible if something catastrophic happens.

Deductible Size

The deductible size in catastrophic homeowner's insurance ranges greatly depending on the real estate value and mortgage lender requirements. Some mortgage lenders require homeowner's insurance with a deductible no larger than 1 percent of the total property coverage, states Professor of Finance Emeritus Jack M. Guttentag. That means if you have $200,000 worth of homeowner's insurance, some mortgage lenders won't let you buy a plan with a deductible higher than $2,000.

Considerations

Having a high deductible homeowner's insurance plan makes financial sense because it prevents people from claiming relatively small things. Insurance companies often raise premiums when homeowners claim items, even in small monetary amounts, says Guttentag. The amount of claims, not necessarily the dollar amount, figures into the set premium.

Solution

Homeowners who want to switch from a lower deductible plan to a catastrophic high deductible plan can save the difference in premiums each month in a savings account. Then, when minimal damage occurs on their property, they can take the money from the savings account and use it to pay those claims, suggests Guttentag. This keeps premiums low and gives people the power of self-insurance.

Umbrella Policy

Taking catastrophic insurance one step further, some people buy umbrella policies. These policies piggyback onto traditional homeowner's insurance but carry very high deductibles. These policies offer coverage above and beyond what regular homeowner's insurance pays. Usually, you can set the deductible as high as the maximum pay-out on traditional homeowner's insurance. These umbrella policies, for example, come with deductibles as high as $100,000 and more.

References

• Mortgage Professor's Website: Questions About Homeowners Insurance
• Investopedia: Insurance Tips for Homeowners