While deductibles on auto policies are usually $250, $500, or $1,000, deductibles on homeowner’s policies are usually $1,000 or even $2,500. On the surface, this just doesn’t seem right. Or is it? Let me explain.
Before I do that, let me explain that it is your responsibility to pay the amount of the deductible before the insurance company has to start paying for a loss. And the insurance company will offer you a reduced premium the higher your deductible is. In other words, the insurance company wants you to have some “skin in the game” and is willing to give you an increasingly higher price reduction the more risk (deductible) you are willing to take on the front end. The insurance company also requires a deductible so that they can avoid using up their resources (adjusters and other claims personnel) on minor losses. Having no deductible policies would not be cost-effective and would actually be cost-foolish to insurance companies which would drive your rates up even more.
So here we go…
Insurance policies are meant to handle catastrophic claims. They were never meant to be a maintenance agreement. This is particularly true for a homeowner’s policy. The frequency of homeowner’s claims is much lower than the number of auto claims but for the most part, they are more costly. That means that there is less chance that you will need to file a homeowners claim which reduces your risk of having to come up with the deductible. After all, your home isn’t moving in traffic at a high rate of speed on Highway 78!
Another big reason that homeowner’s policies have higher deductibles is the fact that insurance companies punish policyholders more harshly on a home claim vs. an auto claim. If the insurance company raises your renewal rate $500 or more due to a filed claim and this increase is multiplied over the next three years ($1500), it wouldn’t make sense to pay $100 to reduce the deductible from $1000 to $500. You may save $500 up front but would end up paying much more in the long run. Simple math dictates that you should have at least a $1000 deductible or even a $2500 deductible. Plus the fact that many insurance companies won’t even accept you if there has been a claim filed within the past three years, the risk vs. reward doesn’t work in your favor. You would be forced to purchase a new policy which may offer less coverage at a much higher cost.
So the bottom line is to have a discussion with your insurance agent. Most savvy agents know that there exists the right balance between the proper deductible on a policy vs. the consequences financially of filing a claim. Knowledgeable agents will be able to assist you in coming up with the right deductible based on the market and your needs. That’s what we do. Please call us today to review your home insurance.