How to choose the best deductible for your homeowners insurance policy
Many factors go into choosing the “best” deductible for your homeowners policy. First, let’s talk about the different types of deductibles. Typical homeowners insurance policies have 2 deductibles. The first deductible is known as the policy deductible and the second is commonly referred to as the hurricane deductible, or as known in the industry as the catastrophic windstorm deductible.
Let’s discuss the standard policy deductible. Normal options for policy deductibles are $500, $1000, $2500, and sometimes $5000 when we are speaking about homes valued under $1 million in reconstruction value. Every deductible offers a percentage discount off the base premium of your insurance policy. These percentages are filed with the New York State Department of Financial Services and are approved when insurance companies file their rates with the state. This is important because deductible options between different carriers can range significantly.
Let’s look at the difference in premium and risk between a $500 deductible and a $2500 deductible. The increase in risk to you is $2000 ($2500-$500=$2000). If we were to increase our policy deductible from $500 to $2500 the premium savings would approach 30%. If your policy was $2500/yr you could be looking at a savings of as much as $750/yr. That would mean that after just 2.7 years you would be ahead of the game in premium savings! ($750 x 2.7=$2025) You still need have peace of mind when purchasing insurance, so if your risk appetite or current financial position will not allow for a $2500 hit then maybe it’s not the best option for you.
How likely are you to put a claim in for $600? Clients call me all the time wanting to file a claim for small amounts. “My screen door blew off” or “Johnny dropped his toy truck on the ceramic tile”. I highly advise against this, especially if it’s close to your deductible, because if you have a few small claims you’re very likely to be dropped by the insurance company. Finding new insurance after a few small claims can be a nightmare and cost thousands of extra dollars. The insurance company’s motto is “Frequency leads to Severity” and they like to stick to that philosophy.
So we now know that many factors go into choosing the best deductible for your situation including; risk appetite, financial position, and premium. My personal opinion is to pay the insurance company the least amount of money, fix the screen door when damaged, and save the insurance for catastrophic events like fire, hurricanes, and pipe bursts.