Home insurance can be tricky to understand. You know you need to protect your abode with a home insurance policy, but how do you determine the right deductible amount?
A deductible is how you share the amount of risk with your insurance provider. It is the amount of money you pay first when filing a claim, and your insurer pays the balance for the loss or damage to your home up to your policy’s limit. The deductible you choose almost always applies for any property loss or damage – it depends on your coverage.
Understanding what your deductible is, when it applies, and how it works is vital to maximizing your policy’s value.
For example, let’s say you have a standard home insurance policy. If you suffer a loss or damage to your home covered by your policy, and that loss is $5,000, and your deductible is $1,000, your insurance company will pay $4,000 after you pay the deductible.
Suppose you have optional coverages on your policy, such as overland flood protection, which is not part of a standard home policy. In that case, it may have a deductible specific to a flood-related claim.
Typically, deductibles apply when filing a claim for damages to your property or dwelling. A rider that is added to your policy for expensive items such as jewellery may be subject to a different deductible. Deductibles do not apply if the claim you need to file is related to your third-party liability coverage; for example, if someone visiting your property falls, is injured, and sues you for damages.
There are different ways to set up your deductibles. Generally speaking, if you set it as high as you can afford (note: ask yourself what you can afford to pay if you must), you’ll have lower monthly premium payments. But raising your deductibles isn’t recommended for everyone. If you opt for a low deductible, you’ll pay less if you file a claim, but you'll have higher monthly payments over the one-year term of your policy.
It’s wise to have a conversation with your broker or insurance agent to review your risk profile and coverage and get their recommendation on what your deductible amounts should be.
Some homeowners prefer low monthly payments, so they select higher deductibles. But for any claims they file, their monthly premiums may increase at renewal.
So, if you can afford to pay for minor damages without filing a claim and do so, your premium is unlikely to rise. What if you don’t file any claims during your policy’s term? In that case, some insurers offer homeowners claims-free discounts and “disappearing deductibles” (if your deductible is $1,000 for the dwelling and no claims are filed, it may decrease to $900 upon renewal).
Don’t choose a high deductible simply to decrease your monthly payments. If you do need to file a claim, but you don’t have the funds to cover the deductible, that can cause financial stress. Whatever deductible amount you choose, try to set aside the funds to cover the cost of it to avoid that predicament.
Having adequate coverage for your home or condo is the best way to protect your digs and your wallet. There are several home insurance discounts different insurers offer to help reduce your premium price without compromising on the coverage you need.
Nevertheless, taking a few minutes to compare policies and premiums for free to see how much you can save is always worthwhile.