High-deductible homeowners insurance is a gamble. If you take out, say, a policy with a $5,000, $10,000 or $20,000 deductible, you're betting you can afford to pay for any damage less than that amount. You're also betting that the repairs you pay for will end up less than the savings you'll realize in lower premiums. The higher your deductible goes, the smaller the premiums you pay.
Because there are so many variables involved in home insurance, it's impossible to guarantee exactly what a high deductible would save you. Forbes says that on a $1 million home with a $2,500 deductible, the owner would save $1,000 a year by switching to a $10,000 deductible (of course, this is given no catastrophe occurs). Consumer Reports notes the premium savings when you switch to a higher deductible will let you pull ahead over time, even if some of your repairs go unpaid because of the deductible.
Depending where you live, high-deductible catastrophic insurance may not be something you have any say in. In Florida, for example, homeowners get two deductibles. The first one is for regular insurance. The second is for hurricanes -- a minimum 2-percent deductible for storm damage on homes worth $100,000 or more. On a $250,000 home, that would make a $5,000 deductible for wind damage from hurricanes mandatory rather than optional.
The higher your deductible, the more catastrophic your losses have to be before your insurance pays off. Minimize your risks by installing security systems and fire alarms and chopping down dead trees before they can fall on your roof. Figure out how much you could pay off in repairs without ruining yourself, and don't opt for a higher amount. Check with your lender, too: some banks won't allow a high deductible for fear you won't be able to rebuild your house after a catastrophe.
If you switch to a catastrophic deductible, or your insurance company insists on one, start putting money aside so you can cover losses that fall below the deductible. The savings on your monthly premiums can become the basis for your emergency fund. Another alternative is to use the savings to take out added insurance on particularly valuable property -- artwork or jewelry, for instance -- if your regular insurance doesn't offer full coverage.
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