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Home insurance deductibles: Pick the right one

home insurance deductible

Home insurance protects you against unexpected losses, but before your insurer will pay your claim, you'll have to reach into your own pocket.

Insurers use policy deductibles -- the amount you'll pay before your insurance kicks in -- to share the cost of losses with policyholders. For example, if you have a $1,000 cash deductible, you're responsible for paying the first $1,000 of any covered loss. For any loss greater than $1,000, your insurance will pay the remainder, up to your policy limits.

According to the nonprofit Insurance Information Institute (III), insurers offer several types of home insurance deductibles, depending on where you live and risks posed by severe weather, floods and earthquakes.

Standard dollar deductibles

Standard dollar deductibles require you to choose a set amount of money that must be paid before your insurer begins paying claims. Generally, the higher your deductible, the lower your insurance premium will be. That's because carriers find that people with low deductibles tend to make more insurance claims, says Karl Newman, president of the NW Insurance Council trade group in Seattle.

For example, if your deductible were $250, then you may file claims for small losses such as broken fences, missing roof shingles or damaged porches. If your deductible were $1,000, you likely would handle small losses yourself.

Percentage deductibles

Unlike standard dollar deductibles, percentage deductibles are based on the insured value of homes. They can be considerably higher than flat-rate dollar deductibles. They typically vary from 1 percent of a home's insured value to 5 percent, according to the III. Percentage deductibles are based on the cost of replacing the entire home.  

In Texas, most carriers require a 1 percent deductible, says Mark Hanna, a spokesman for the Insurance Council of Texas. So if a home is insured for $200,000 with a 1 percent deductible, the policyholder must pay the first $2,000 of the insurance claim.

Homeowners typically have a standard dollar deductible for most perils, such as fire and theft, says Michael Barry, a spokesman for the III. However, when the National Weather Service determines that a severe storm has made landfall, the insurer often imposes a percentage deductible that must be used for storm damage claims.

Percentage deductibles can vary widely within a single community, Barry adds. These deductibles sometimes are based on how close individual homes are to the coastline, where storm damage can be severe.

Amy Bach, executive director of the California-based United Policyholders consumer group, says some insurance companies offer a combination deductible.

"There are companies that offer home policies with a flat-dollar deductible on contents and a percentage on the dwelling," Bach says. "They have gotten more common."

Wind/hail deductibles

Insurers often limit their risks by placing higher deductibles on claims resulting from hurricanes, wind and hail. These deductibles typically are separate from those paid by homeowners for protection from other perils, such as fire and theft.

There are two types of wind-damage deductibles. Hurricane deductibles apply to damage just from hurricanes. Windstorm and wind/hail deductibles apply to any kind of wind damage.

Wind/hail deductibles were developed because of home damage resulting from extreme weather, says Newman. For example, Hurricane Katrina, which struck states along the Gulf Coast in 2005, cost insurers more than $41 billion, according to the III. After Katrina, reinsurance companies -- insurers who share the cost of claims with primary carriers -- decided to limit their exposure to losses.

In Texas, the state government has stepped in to make home insurance more affordable in areas subject to wind damage. Hanna says homeowners in 14 Texas counties along the Gulf of Mexico typically can't get home insurance policies that include windstorm coverage through traditional carriers. Instead, they buy wind-damage policies through the state-created Texas Windstorm Insurance Association. These polices have deductibles that begin as low as $100.

Flood and earthquake deductibles

Damage to homes from floods and earthquakes aren't covered by standard home insurance policies.

Flood protection is available through the National Flood Insurance Program, which is overseen by the Federal Emergency Management Agency. Lenders typically require flood insurance for homeowners with federally backed mortgages and live in high-risk areas.

Maximum residential deductible limits for flood insurance through the NFIP were raised from $5,000 to $10,000, according to an April article in USA Today. This means people now can choose higher deductibles to reduce their annual flood insurance premiums.

If you live in an area prone to earthquakes -- such as Alaska, California and Nevada -- you can purchase earthquake insurance from a surplus lines carrier as an endorsement or a separate policy.

Deductibles for earthquake coverage can range from 2 to 20 percent of the replacement value of the structure, according to the III. California residents purchase earthquake insurance through the California Earthquake Authority, where the standard policy has a 15 percent deductible.

Regions impacted by severe weather

According to the III, home insurance companies in 19 hurricane-prone states and Washington, D.C., now require percentage deductibles. They are: Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas, Virginia and Washington, D.C.

No matter where you live, it's important to understand just how much you may have to pay when you file a policy claim, says Kevin Foley, a New Jersey insurance agent. Make sure you don't choose a deductible you can't afford, he advises.

Although a higher deductible can save you money on premiums, you'll have to pay more when you have a claim, Foley says.

When possible, avoid percentage deductibles and wind/hail deductibles. If you can't find a policy with a standard dollar deductible because of the risks your home faces, you still may be able to save by shopping around for the best price available.  

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