Home insurance is a necessity for every homeowner, but navigating the complexities of choosing the right policy can be overwhelming—especially for first-time buyers. One of the most common decisions homeowners face is determining the size of their deductible and how it affects their premiums.
But before diving into the details, let’s break down what deductible and premium actually mean. A home insurance premium is the amount you pay periodically (monthly or annually) to maintain your coverage. A deductible is the amount you pay out of pocket when you file a claim before your insurer covers the rest.
For example, if your home sustains $15,000 worth of storm damage and your deductible is $2,000, you will pay the $2,000, and your insurance will cover the remaining $13,000.
Generally, a higher deductible results in a lower premium, and vice versa. According to a recent analysis, the national average cost of home insurance for $300,000 in dwelling coverage is $2,230 annually for those with a $1,000 deductible, while choosing a $2,000 deductible reduces the premium to $2,046.
The decision ultimately boils down to balancing short-term savings with potential long-term costs. Let’s explore the factors that influence this choice and how you can make the best decision.
Factors to Consider When Choosing a Deductible and Premium
Where You Live
Your location plays a significant role in determining your home insurance premiums. Insurance companies assess the risk of natural disasters, crime rates, and proximity to fire stations when calculating rates. For example, homeowners in areas prone to wildfires, like parts of California, or hurricane-prone zones, like Florida, may want a lower deductible to ensure they can afford repairs in case of an event.
Tim Choate, CEO of RedAwning.com, explains that homeowners in regions with higher risk factors are more likely to file claims, making a lower deductible a safer option. On the other hand, homeowners in areas with fewer natural disasters might opt for a higher deductible to reduce their premium payments, freeing up money for other investments.
According to a Bankrate report, states like Nebraska ($5,655 per year), Florida ($5,527 per year), and Oklahoma ($4,835 per year) have some of the highest home insurance costs. Conversely, states like Vermont ($806 per year), Delaware ($966 per year), and New Hampshire ($980 per year) are among the most affordable.
What You Can Afford
Before making any decisions, it’s important to evaluate your finances. While a higher deductible can save you money on premiums, it’s essential to ensure you can afford to pay it out-of-pocket if you ever need to make a claim.
Fred Goncher, a mortgage broker, advises that homeowners shouldn’t choose a deductible they cannot comfortably afford. “If you’re living paycheck to paycheck, a $5,000 deductible might not be a wise choice, as you may not be able to cover it after a loss,” he warns.
Flexibility: You Can Switch Later
What if you choose a higher deductible to save on premiums now, but later decide you want the peace of mind that comes with a lower deductible? The good news is that you can often adjust your deductible when renewing your policy, although this may require approval from your mortgage lender.
Doug Perry, a strategic financing advisor at Real Estate Bees, suggests that opting for a higher deductible initially can help you save on premiums at closing. Then, when you renew the policy, you can consider lowering your deductible if it better suits your needs.
Expert Opinions on Deductibles and Premiums
There are varying opinions among experts regarding the best strategy when it comes to choosing deductibles and premiums.
Denise Supplee, founder of Sparkrental, argues that higher deductibles can lead to significant savings. “Increasing your deductible from $1,000 to $2,500 can save you about 12% on your premium,” she says. “This 12% savings can be put into a savings account to cover potential out-of-pocket expenses not covered by your insurance.”
On the other hand, Cedric Stewart from Keller Williams recommends keeping your deductible lower. He explains that the small premium savings from a higher deductible might be negated if you file multiple claims or incur repair costs that exceed the deductible.
What’s the Bottom Line?
Ultimately, the right choice depends on your personal financial situation, risk tolerance, and where you live. Experts agree that there is no one-size-fits-all answer when it comes to choosing a deductible and premium.
It’s crucial to compare various insurance options and find a balance between what you can afford now and what will serve you well in the event of a claim. Shop around, talk to your insurance agent, and weigh the pros and cons before making a decision.
Disclaimer:
This article is for informational purposes only and should not be construed as financial or insurance advice. Always consult with a professional insurance agent or financial advisor before making decisions about your home insurance policy.