If you happen to own your own home, it’s important to have the right kind of insurance in place to secure your investment. Traditional policies usually come with a low deductible, but the trade-off is often higher premiums. If you want to save more money on your long-term homeowners insurance costs, a high deductible policy may be the better choice for you. However, this comes with substantial risk too, as you’ll need to pay more should you ever put in a claim.
It could be helpful to consult a financial advisor when deciding on long-term costs related to your home and financial plan. Speak with a financial advisor today.
How High Deductible Homeowners Insurance Works
When you buy homeowners insurance, you’re typically able to choose how much of a deductible you want. You can generally go as low as $500 or as high as $100,000, depending on what you’re comfortable paying if you have to file a claim.
With a high deductible policy, the deductible is usually calculated as a percentage of your home’s value. For instance, if your insurer uses a baseline of 1% and your home is worth $250,000, your deductible would be $2,500.
The primary advantage of choosing an insurance plan with a higher deductible is that it reduces your premiums. The amount of money you’ll save varies based on where you live and which company you purchase your coverage through, but it can easily add up to several hundred dollars per year. If you go several years without filing a claim, that’s a lot of money you’re putting back into your pocket.
Potential Problems With High Deductible Policies
If you’re comparing insurance policies and a high deductible plan is on your radar, it’s important not to overlook the possible downsides.
For one thing, even though the deductible percentage may be fixed, the dollar amount can change. As your home gains value, your deductible would also increase. If you don’t have a decent cushion of emergency savings (at least the size of your deductible) you may be out of luck if your home has damages and you can’t afford to cover the deductible.
Something else that it’s important to be aware of is the potential for other deductible costs to pop up. If you have clauses built into the policy that cover specific catastrophes, these may require you to pay a separate deductible when you file a claim.
For instance, deductibles for wind or hurricane damage policies can be 10% higher than the general deductible. The deductible limits are usually high in areas that are prone to hurricane activity, so if you live along the coast, you may be coughing up a lot of cash if disaster strikes.
Your Premiums Can Still Increase
Going with a high deductible plan doesn’t guarantee that you’ll be able to lock in lower premiums. If you have to file a claim, your insurance company could decide to hike up your rate. The result could be a premium that’s anywhere from 9% to 32% higher. If that happens, the money you’ve saved by choosing a high deductible plan goes right out the window.
Your credit can also have an impact on what your premiums are. If your credit score drops right before your policy comes up for renewal, your insurance company may see that as a red flag and deem you a higher risk. In that scenario, you may still end up paying higher premiums despite having a larger deductible.
If you’ve got good credit and you can afford the expense of a higher deductible, it may seem like the right move. But it’a good idea to still do some comparison shopping. Taking a look at how much money you stand to save with a high deductible policy versus one with a flat fee can tell you if it’s really worth it.
You may also want to consider what risk level your area has for needing to use homeowners insurance. For instance, if you’re in an area where hurricanes are prevalent, a high deductible insurance plan could be a risky move.
Home Buying Tips
- Buying a home can have a major effect on your long-term financial plan, as can 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 up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one 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.
Photo credit: ©iStock.com/Reuben Schulz, ©iStock.com/Susan Chiang, ©iStock.com/vkbhat