What Kind of Deductible Should I Carry on My Home Insurance?

The value of your home may factor into your deductible decision.
i Jupiterimages/Stockbyte/Getty Images

One of the things you have to decide when buying home insurance is the size of the deductible you want to carry. The deductible is an amount you pay upfront when making a claim for covered benefits. In general, higher deductibles reduce your premiums and lower deductibles limit out-of-pocket expenses on a claim.

Low-End Deductibles

The lowest deductible typically recommended by a home insurance company at the time of publication is $500, according to the Insurance Information Institute (III). Common deductibles run as high as $1,000. However, the difference in premiums when you go from a $500 deductible to $1,000 is significant as the III indicates you could save 25% on your insurance payments with the lower sum.

Moderate Increase

Some homeowners raise deductibles to $2,500 or even $5,000 in an effort to save on premiums. This can lead to several hundred dollars or more in potential savings depending on the value of your property. The risk, of course, is that you would have to pay that amount right off the bat when filing a claim. Therefore, the key question a homeowner must ask is "Can I afford to pay that amount if something happens to my property?"

Extreme Deductibles

A possibility for well-to-do homeowners has been to raise deductibles to as much as $100,000. While that amount may seem outlandish, Forbes magazine has pointed out that the typical reward-to-risk ratio favors the homeowner. Raising your deductible to that level can save you $1,000 or more on annual premiums. While your out-of-pocket risk is tremendous, you still have coverage for a total loss or an exceptionally devastating accident.

Weighing Options

Some insurers receive claims about once every 20 years from a typical homeowner. Many are for relatively modest damages that cost several thousand dollars. If you keep a $2,000 deductible and save $500 a year over the premiums associated with a $500 deductible, you would have saved $6,000 in 20 years. This math doesn't factor in the value of investing that money. The savings easily covers the $2,000 outlay you would have made had you suffered a loss during that typical 20-year cycle.

the nest