11-16-2015 09:20 AM
Content provided courtesy of USAA.
When you experience a loss covered by your homeowners insurance policy, the deductible is the amount you're responsible for before insurance pays.
For example, let's say a tree falls on your house, and it costs $5,000 to repair the damages and cart off the tree. If you have a $2,500 deductible, you're on the hook for the first $2,500, and your property insurance company will cover the remaining $2,500.
Deductibles share the financial risk of loss between you and the insurance company. The more risk you take on through a higher deductible, the less you'll be required to pay in premiums.
Generally speaking, deductibles apply only to property damage, not the liability that kicks in when you are found legally responsible for injuries to other people or damage to their property.
A homeowners insurance deductible may be complicated. Here are the types of deductibles you may encounter:
- Dollar-value deductible. Just like an automobile insurance policy, some homeowners policies set a flat-rate dollar deductible. They're often set between $1,000 and $2,500.
- Percentage deductible. Most of us think of an insurance deductible as a specific dollar amount, but many deductibles on homeowners policies are stated as a percentage of the home's insured value. For example, if your home is insured for $200,000 and your homeowners policy has a 1% deductible, you would be responsible for $2,000 before insurance benefits begin. If the insured value of your home rises, your deductible will rise with it.
- Split deductible. If you live in a catastrophe-prone area, you may find your homeowners policy has multiple deductibles that differ depending on the cause of loss. For example, you may have one deductible for wind and hail and another for other risks.
It's worth noting that homeowners policies generally don't cover floods. To help protect your home against that risk, you also should consider purchasing a flood insurance policy.
No matter which type you have, it may be tempting to lean toward a lower deductible. After all, who doesn't want their insurance company to pay more at claim time? But remember the trade-off: Generally, the lower your deductible, the higher your premiums.
When striking the balance between deductibles and premiums, it's often best to avoid extremes in either direction. Set your deductible too high, and you may end up scrambling to come up with cash for repairs when something actually goes wrong. Set it too low, and you'll be saddled with high premiums.