Guide to Homeowners Insurance Deductibles

While everyone needs it, buying homeowners insurance can be intimidating. There's much to learn, including how premiums work, what a home insurance deductible is, and how to snag discounts on homeowners insurance. Here, we'll break things down in a comprehensive way, explain how a homeowners insurance deductible works, and help demystify homeowners insurance.

What is a homeowners insurance deductible?

A homeowners insurance deductible is the amount a person agrees to pay toward any claim. For example, if a homeowner opts for a $1,000 deductible, that means they are responsible for paying the first $1,000 when a claim is filed.

Let's say a tree falls on a house, causing $11,000 worth of property damage. The homeowner would pay $1,000 toward repairs, and their insurance company would cover the remaining $10,000.

Now, imagine that it's a few months later, a storm comes through, and a portion of the homeowner's roof is blown away. Because the deductible applies to each claim separately, they'll need to cover the deductible again. That means they'll pay $1,000 toward the roof repair and the insurance company picks up the rest.

Common types of home insurance deductibles

The most common types of homeowners insurance deductibles are flat, percentage, and split. Here's how each works:

Flat deductible

As described above, a flat homeowners insurance deductible is a fixed dollar amount homeowners are expected to pay toward a covered claim. Once you decide how much you want your deductible to be, that's the flat amount you will pay for each claim.

Percentage deductible

As the name suggests, a percentage deductible is based on a percentage of a home's insured value. Let's say a home is insured for $200,000 and the deductible is 2%. That means the policyholder is responsible for the first $4,000 of a claim ($200,000 x .02 = $4,000).

Split deductible

Some insurance companies offer a hybrid of sorts. A dollar amount applies to "ordinary" claims, but a percentage deductible is used when pre-specified claims are made. For example, an insurance policy may have a $1,000 homeowners insurance deductible for everyday occurrences (like theft or roof repair) but require homeowners to pay a percentage deductible for claims due to an earthquake or hurricane. Each insurer has its own list of which claims trigger the percentage deductible. These are sometimes referred to as "disaster deductibles."

What are disaster deductibles?

Disaster deductibles are required for predictable "big dollar" claims. For example, insurers expect there to be claims for hurricanes in parts of the Southeast, and they expect those claims to be costly. For that reason, homeowners living in hurricane-prone areas may be required to pay a percentage of hurricane-related claims. Here are some of the most common disaster deductibles, including more about hurricane deductibles:

Hurricane

Let's say a home suffers hurricane damage and the homeowner's deductible is 2%. Because the homeowners insurance deductible applies to the home's total value, how much they end up paying depends on how much the home is worth.

For example, if the house has a value of $300,000, a homeowner with a 2% deductible would pay the first $6,000 in repairs ($300,000 x .02 = $6,000), and the insurer would pick up the rest. Of course, if the homeowner opted for a higher deductible in exchange for lower policy costs, their out-of-pocket expense would be more.

Wind and hail

Just as some coastal areas experience hurricanes, some Midwest areas are prone to tornadoes, hail, and strong winds. Homeowners insurance deductibles for wind and hail typically range from 1% to 5% of a home's value.

Flood

Not only do flood deductibles vary by the insurance company, but they also vary by state. Further, homeowners may be able to purchase flood insurance with either a flat or percentage deductible.

Earthquake

Earthquake deductibles range from 2% to 20% of replacement value, depending upon where you live and how at-risk that area is for earthquakes.

What is the average homeowners insurance deductible?

For anyone wondering, "What is the standard deductible for homeowners insurance?" a typical homeowners insurance deductible ranges from $500 to $2,000, although the average homeowners insurance deductible is $500. The low deductible means homeowners are paying more for their annual premium, but have peace of mind knowing that they only have to come up with $500 in the event of a covered claim.

How to choose the right home insurance deductible for you

Only you know how much you can afford to pay out of pocket. Suppose you live from paycheck to paycheck and don't have money put away in an emergency savings account. In that case, you'll likely want to keep your deductibles low, even if it means paying a higher policy premium. That's because the contractors who work on homes following a claim have a right to hold homeowners responsible for their portion of the bill and can go so far as to sue or put a lien on the property until paid.

How do homeowners insurance deductibles affect premiums?

How high (or low) a homeowners insurance deductible is directly impacts premiums.

Here's how premiums work: The higher the deductible, the lower the premium. Conversely, the lower the deductible, the higher the premium. The trick is to imagine the worst-case scenario, determine how much money you can reasonably expect to come up with in an emergency, and base the deductible on that.

Getting your homeowners insurance deductible waived

There are some situations under which an insurance company will waive the deductible, allowing homeowners to have their claim met without forking out any money. What can be confusing about deductible waivers is that they vary so dramatically by insurer. Here are three of the more common deductible waivers:

Large loss waiver

Some insurance companies offer to waive a deductible once a claim hits a certain threshold. For example, it may be that the deductible is waived once a claim hits $10,000 or $15,000. Large loss waivers can save homeowners big and are worth checking on when comparing insurers.

Disappearing deductible

Insurers may also offer a disappearing deductible. Here's how it works: Let's say a "set" deductible is $1,000. However, an insurer lowers the deductible amount by 20% each year. In this case, the homeowner would have no deductible after five claim-free years. So in addition to discounts on homeowners insurance, bundling can help homeowners save big when it comes time to pay a deductible.

Combined coverage waiver

Other insurers reward customers who carry more than one type of insurance with them by waiving their deductible. For example, if someone has homeowners, auto, and life insurance all with the same insurer, they may waive the deductible the first time a claim is filed.

What is the standard for homeowners insurance? It's the amount that's right for you. Not only should a homeowner choose enough coverage to make their home as good as new in the event of property damage or theft, but they should pick a deductible that is easy to pay.

Much of your time and money go into your home. Understanding how homeowners insurance works is the first step toward protecting your investment.