Can High Deductible Homeowners Insurance Save You More?

Homeowners insurance protects your home and other covered property against losses specified by your policy. Your choice of deductible affects both the premium you pay and how much of a covered loss falls to you. Taking on a larger deductible may reduce the cost of coverage, but it also means assuming more of the financial burden when a claim occurs. Whether that approach ultimately saves money depends on the premium difference, your claims experience and your ability to absorb the expense.

A financial advisor can help you account for insurance premiums, deductibles and other housing expenses in your broader financial plan. Speak with a financial advisor today.

How High Deductible Homeowners Insurance Works

When you buy homeowners insurance, insurers may give you a choice among several deductible amounts. Depending on the policy, the deductible might be stated as a dollar figure or calculated using a percentage tied to the amount of dwelling coverage. The choices available to you will depend on the insurer, property and location.

A percentage deductible can translate into a substantial dollar amount. Suppose your home carries $400,000 of dwelling coverage and the applicable deductible is 2%. That means you’d need to pay $8,000 before insurance kicks in. At 5%, your responsibility would rise to $20,000.

The appeal of a larger deductible is the reduction it may produce in your insurance bill. Paying a smaller premium over multiple years can lower your cumulative cost when claims are infrequent. A covered loss, however, can quickly offset some or even all of those prior savings because you have agreed to bear a greater share of the expense.

Potential Problems With High Deductible Policies

Before selecting a high deductible, it’s important to know how you would pay that amount in the event of an unexpected loss. Emergency savings, for instance, can provide that money without requiring you to borrow or redirect funds needed for other bills. But without that cash on hand, you could end up taking on debt or

The dollar amount associated with a percentage deductible can also move higher when the dwelling coverage on your policy increases. At 2%, for example, $300,000 of applicable coverage produces a $6,000 deductible. Meanwhile, $400,000 produces an $8,000 deductible. Checking the declarations page when the policy renews can show you the amount currently at stake.

One policy can also impose different deductibles depending on what caused the damage. Storm-related losses, including those involving hurricanes, wind or hail, may be handled under separate provisions. In some policies, those deductibles are expressed as percentages and can be considerably larger than the amount that applies to other covered losses.

Consider a policy with $400,000 of dwelling coverage and a 5% deductible for an applicable storm loss. The homeowner’s share in that scenario would be $20,000. That amount illustrates why each deductible listed in the policy deserves separate attention rather than treating the standard deductible as the maximum you might have to fund.

Lastly, it’s worth underscoring that a larger deductible only addresses one component of your insurance price. Renewal premiums can still move up or down as insurers account for claims, construction and repair expenses, catastrophe risk, property characteristics and other rating factors. As a result, selecting a high deductible does not insulate you from future increases in the overall cost of coverage.

How to Calculate Whether a Higher Deductible Saves You Money

One way to evaluate two deductible choices is to measure the extra claim expense against the difference in annual premiums. The result shows how many years of lower premiums it would take to accumulate savings equal to the additional deductible amount.

For example, assume you are comparing these two policies:

Option	Annual Premium	Deductible
Lower deductible	$2,400	$1,000
Higher deductible	$2,000	$5,000

Choosing the $5,000 deductible reduces the annual premium by $400 while adding $4,000 to the amount at risk when a deductible applies. Ten years of $400 premium reductions would total $4,000, matching that difference.

This calculation does not predict which policy will ultimately cost less. Claims could occur at any point, and premiums can change at renewal. Instead, it puts the additional financial responsibility and the potential savings into comparable dollar amounts.

Use the same approach with quotes based on your own home. Keep coverage limits and policy provisions comparable so that you are measuring the effect of the deductible rather than differences in protection. Convert any percentage deductible into a dollar figure as part of that review, particularly for hurricane, wind or hail coverage.

How Much Cash Should You Keep for Your Deductible?

Base your cash reserve on the deductible that could create the largest realistic expense under your policy. Review the declarations page for the standard amount as well as any separate provisions that apply to hurricane, named storm, wind or hail losses.

Suppose the ordinary deductible is $2,500, while a hurricane provision equals 5% on $400,000 of dwelling coverage. That percentage represents $20,000. A cash reserve built around only the $2,500 figure would therefore fall $17,500 short of the larger amount in the event of damage due to a hurricane.

That money does not have to sit in an account labeled specifically for an insurance claim, but it should be accessible if a covered loss occurs. Before accepting a larger deductible in exchange for a lower premium, identify which liquid funds you could use to meet that obligation without disrupting other essential expenses.

Bottom Line

A high deductible can lower the price of homeowners insurance, but evaluating the decision requires looking beyond the premium alone. Put each deductible into dollar terms, compare that amount with the savings offered by the insurer and identify the cash you could access after a loss. Reviewing separate storm provisions alongside the standard deductible can also reveal expenses that may not be obvious from the headline premium.

Home Buying Tips

Buying a home can have a major effect on your long-term financial plan, as can the cost of homeowners insurance. A financial advisor can help you account for this. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Is your new home purchase a second home in your real estate portfolio? If so, check out SmartAsset’s guide to insurance on your second home.