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How High Should My Homeowners Insurance Deductible Be?
Published: 04/19/2011 by Kevin Mulligan
» Mortgage
Even if you don't consider your home an investment, you are still pouring thousands of dollars into a house. You've got a down payment worth thousands of dollars, your monthly payment, property taxes, and landscaping maintenance costs. There's a lot of money associated with living in a house.
If you're going to be putting so much money on the line, you need to protect that investment with homeowners insurance. Your mortgage company won't let you decide whether or not you get insurance – it is mandatory – but they will let you decide how high you want your deductible to be.
What is a homeowners insurance deductible?
A homeowners insurance deductible is very similar to an automobile insurance deductible. A deductible is the amount of money you are responsible for paying if you file a claim with the insurance company. If the damages are less than your deductible, you cover them out of your own pocket. If the damages are higher, you pay up to the deductible and then your insurance covers the rest.
How high should my deductible be?
There are a lot of options for homeowners insurance deductibles. The cost range is vastly different from your car insurance. Your deductible can be as low as zero or $500, but as high as $5,000. That's a lot of money to front if something happens to your home.
How high your deductible should be is determined by several factors: whether or not you can handle an emergency, and how likely you will need to use your homeowners insurance.
Do you have an emergency fund?
If you own a home you absolutely need an emergency fund. Things will inevitably break at the worst time, and having money set aside to handle those emergencies is critical to not going into debt. Taking that into consideration, the higher your emergency fund (the better prepared you are) the higher your homeowners insurance deductible can be. If you are just starting out and have a small emergency fund then it is worth it to pay a higher annual premium for your insurance.
Is your home at risk?
Another factor to consider is how likely is your home to receive serious damage. Are you in a floodplain? Does your area historically receive a lot of natural disasters such as tornadoes and hurricanes? The higher your risk, the more likely you will use the insurance and thus pay the deductible.
How much will a high deductible save you?
You also need to perform a cost benefit analysis. Will increasing your deductible $2,500 save you $10 or $200 per year? That's a big difference. If you only saved $10 per year then you would never pay back that difference (unless you plan on being around for 250 years). At $200 per year saved you'll pay back that higher deductible in 12.5 years. That's more realistic.
When you are filing out the online application or talking to an agent, make sure to get quotes on multiple options for your homeowners insurance. Once you have the financial facts in front of you, you'll be able to make a better decision for your specific situation.
