How to choose the right home insurance deductible

When you buy home insurance, it can seem awfully tempting to accept a high deductible in return for a lower premium. It even sounds reasonable -- until something bad happens and you've got to come up with $1,000 in out-of-pocket costs for home repairs.

Consider this: A tree slams into your house during a ferocious thunderstorm. Then even more damage comes your way: The insurance agent reminds you that the first $1,000 in repairs must be paid by you, since your deductible is $1,000.

And here's another consideration in the deductible debate: You're one of those homeowners who insists on the protection of a $250 deductible, even though it means higher premiums. You feel secure, but every time you write that premium check, you think, “Do I have to pay that much?”

the balancing act of setting the deductible for your home insurance

Most home insurers let you balance your deductible against your premiums. So, what kind of balance is right for you? Do you fall into the $250 category or the $1,000 category? The rule of thumb is that you shouldn’t set your deductible so high that it really hurts if you've got to file a claim.

How much hardship can you handle?

Mario Morales, manager of corporate underwriting at MetLife, says: “The question to ask yourself is, ‘If I have a loss, how much can I absorb without a hardship?’” That is, can you afford $1,000 in repairs if a tree falls onto your house?

The typical deductible for home insurance is $500, according to Morales. If you want to set it at $250 because you’re nervous about out-of-pocket costs, expect a surcharge. Can you handle $1,000 and are willing to take the risk? Look for a discount.

Insurance consultant Dan Weedin offers this guidance for selecting a deductible: “Wherever you start to get that ‘gag reflex’ on paying out, that’s where you set your deductible.” If you figure you wouldn’t even want to bother turning in a claim for less than $1,000, you know you’ve found the right deductible for you, he says.

New homeowners who just put every dime into a down payment probably should stomach a slight increase in their premiums in exchange for a low deductible to offset any out-of-pocket expenses. Meanwhile, it makes sense for established homeowners with bigger cash cushions to go with a combo of a higher deductible and lower premiums.

Do the math

Is there a formula that lets homeowners automatically find the ratio between premiums and deductible? Unfortunately, no. The deductible savings varies from insurer to insurer and house to house, but Weedin says the savings will pretty much disappear at a certain point.

“Let’s say you go from a $1,000 to $2,500 deductible. That may save you only $100 a year in premiums," Weedin says.

The lesson here: It’s probably not worth a $1,500 risk to save $100 a year.

So, what is worth the risk? Before making a decision, do the math, because what sounds like a good deal may not add up. For example:

Scenario 1: You go the $1,000 deductible route, which saves you $100 a year in premiums compared with a $500 deductible. Over three years, you have just one claim, for $2,000. Your receive $1,000. All told, you've got $1,300 in your pocket.

Scenario 2: You pick a $500 insurance deductible, which costs $100 a year more than the $1,000 choice. Again, over three years you make just one claim, for $2,000.You get a check for $1,500, but you’ve been paying an extra $100 a year, so it’s really only $1,200 when compared with the $1,000 deductible.

In this case, the higher deductible saved you money -- but only $100. Think about your past claims and add your insurer’s savings into the calculations before automatically going with one scenario over another.

Home repairs and home values

Mark Carrasquillo, an account executive with insurance broker E.G. Bowman Co., says homeowners might be willing to settle for a high-deductible, low-premium arrangement -- if they’re not fussy about repairs.

Let’s say your dishwasher floods your kitchen floor and basement. You have a $2,500 deductible and $2,000 in damage. But if you don’t want to spend $2,000 right away, you can take care of just the essentials, Carrasquillo says. So if the basement ceiling is hideously stained but structurally sound, you can leave it as is and fix it later, when you have the cash.

Patti Clement, vice president and managing director at insurance provider HUB International Northeast, advises homeowners to put their deductible-premium balance in the context of their home’s value. For rich people with high-end homes, she’d offer a deductible starting at $2,500 and perhaps running as high as $10,000. Premiums for luxury homes may be so large that higher deductibles may make more sense.

“I’d also recommend a minimum deductible of $5,000 on a home valued at $1 million or up,” Clement says. "You should aim for insuring against catastrophic events.”

In other words, don’t bother insuring against a few wind-damaged rain gutters. Clement emphasizes that it’s not in a homeowner’s best interest to file a lot of small claims. Your claims history plays a part in how much you pay for insurance -- even if you switch insurance companies.

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