Insurance deductibles represent your out of pocket expense when you make a claim on your insurance policy. In auto insurance, deductibles are straightforward flat dollar amounts. Many drivers are familiar with auto policies that have a $500 deductible. Homeowners insurance is more complicated. In most cases, homeowners insurance deductibles are a percentage of the amount of insurance on the home. Some homeowners mistakenly assume their deductible is a percentage of the claim amount. It isn’t. THE DEDUCTIBLE IS A PERCENTAGE OF YOUR PROPERTY'S INSURED VALUE. This means that it changes as your insured value changes.
Twenty years ago, flat dollar deductibles on insured homes were common. Since that time, insurance companies have gradually shifted to percentage deductibles. To avoid surprises after a claim, policyholders should be aware of the dollar amount for each deductible on their policy. Beginning in 2014, INSURANCE COMPANIES MUST NOW LIST THE ACTUAL DOLLAR AMOUNT FOR EACH DEDUCTIBLE ON THE POLICY.
It’s important to realize that a typical homeowners policy has two different deductibles that apply depending on the cause of loss. One deductible applies in the case of wind or hail damage while a separate deductible applies to most other types of loss (fire, theft, water, etc.). Frequently, the amount of both deductibles is the same but they don’t have to be. Most homeowners policies today have a 1% deductible for all causes of loss subject to a deductible. A 1% deductible on a home insured for $200,000 means a maximum out of pocket cost to the policyholder of $2,000 per claim.
Homeowners who live in areas prone to hurricanes, tornadoes, or severe hail storms need to pay particular attention to their wind deductible. Some insurance companies in coastal areas, including the Texas Windstorm Insurance Association (TWIA), offer large windstorm deductibles of 5% or higher. These deductibles can lower otherwise high premiums but some policyholders have been surprised by the amount of their out-of-pocket costs after a hurricane. For example, if a $200,000 home sustains $10,000 worth of hurricane damage, with a 5% deductible the policyholder must pay the entire $10,000 out of pocket.
Policyholders should discuss and compare all deductible options with their agent and have a plan for out-of-pocket costs before selecting a policy with high deductibles. Keep in mind, some companies require a special high deductible for tropical storm and hurricane coverage as a condition of the policy. Not all insurers do, so it’s important to shop around and compare different options to find insurance that fits your needs.
When considering a policy, be sure to understand what your out-of-pocket costs will be. Always discuss deductible options with an agent as well as your risk of loss. Ask if your area is prone to particular types of loss such as hailstorms or wildfire. If an agent seems uncertain about what to do, shop your policy and talk to someone else. A bad decision could cost thousands of dollars if you have to file a claim.