A deductible is the amount of money you must cough up out of your own pocket before your homeowners insurance kicks in and pays its part of the claim. Even if you can afford to foot more of the cost, your mortgage lender may limit how much of a deductible you can take, points out USAA, a property and casualty insurer. Your lender will make you carry at least enough insurance to cover your mortgage loan.
How Deductibles Work
Paying a deductible is one way to lower the cost of your insurance premiums. A higher deductible makes you responsible for more of the expenses when you suffer a loss. In return for taking on more of the financial risk, the insurance company gives you a break in the premium rates you pay. Still, it makes sense to choose a deductible you can afford to pay without straining your finances. For this reason, mortgage lenders often put a cap on the maximum insurance deductible a homeowner can take.
If you pay a low deductible and then have to file a claim, your insurance company has to cover more of the costs up to the policy limits. This might not save you money in the end, though, as your insurer will pass on those costs to you in the form of higher premiums. While you may have no choice other than taking a lower deductible if you can’t risk having to pay a large chunk of money out-of-pocket should something happen, you can always increase your deductible as your financial situation improves.
Deductible rates vary from state to state. The minimum deductible available to you depends on the state in which you live and the insurance company you choose. Although your mortgage lender will require that you carry homeowners insurance, you may have to shop insurance companies if you can afford to pay only a low deductible. Some insurers make you take a minimum $1,000 deductible, notes Jeff Brown, president of Brown's Insurance Agency in Manassas, Virginia, in an article for Bankrate.com. If you can't afford a company's minimum deductible, keep on comparing rates.
If your household budget is increasing faster than the money you have coming in, choosing a higher insurance deductible can help reduce rising insurance costs. Generally, the deductible you pay is a fixed dollar amount, although more insurance companies are offering deductibles based on a percent of the amount of coverage you buy. For example, if you insure your home for $225,000 and your deductible is for 1 percent of the insured value, you must pay $2,250 toward the loss before your insurance policy pays. Some companies also charge separate deductibles for different types of coverage. Depending on the terms of your homeowner policy, you could find yourself paying multiple deductibles when you file a claim.
Amber Keefer has more than 25 years of experience working in the fields of human services and health care administration. Writing professionally since 1997, she has written articles covering business and finance, health, fitness, parenting and senior living issues for both print and online publications. Keefer holds a B.A. from Bloomsburg University of Pennsylvania and an M.B.A. in health care management from Baker College.