Home insurance can sometimes be tricky. You know you need a home insurance policy, but how do you find the right deductible amount? On the one hand, you want low monthly payments. On the other, you don’t want a high payment to make if something happens and you have to file a claim. But, what’s the right deductible amount? And, how can you get the most savings? Let’s explore a few ways to calculate your deductible and weigh the pros and cons.
Understanding Your Home Insurance Deductible
Your deductible is how much you as a homeowner and policy owner have to pay out-of-pocket (yourself) for damages to your property. This is the payment you pay before your insurance will make any payment towards the damages or a loss when you file a claim. Let’s look at an example.
Your upstairs neighbor’s tub overruns and it floods your apartment. The damage totals $10,000. If you have a $1,000 deductible, you don’t then send $1,000 to the insurance. No, if the claim is covered by the insurance company, they will send you $9,000 which is the balance of the claim.
When setting up deductibles, there are different types. A dollar amount deductible can be set up or a percentage-based deductible can be set. Depending on how the insurer calculates your deductible can depend on the value the home is assessed at. When that amount is tallied, then there’s a fixed amount that you as the homeowner pays if you need to file a claim over the term. This is the length of your policy.
How to Set Your Deductible for Your Home Insurance
There are different ways to set up your deductible. But, generally speaking, if you set it as high as you can afford it, you’ll have a lower premium which is your monthly payments. If you raise your deductible, it might lower your monthly payments by 20 percent. But, raising your deductible isn’t recommended for every homeowner.
Setting your deductible amount can vary based on how much you can afford with your deductible amount. That’s the amount you’ll have to cover if something happens and you have to file a claim. The more you can afford with your short-term, (deductible), the more you’ll save long-term with your monthly payments. But, some homeowners see it differently.
Some homeowners look at it from the standpoint “What’s the cheapest I can pay every month?” Or, “How do I get the lowest payment?” That’s assuming your premiums are paid every month and not annually in one lump payment.
Want lower monthly payments?
To lower your monthly payments (long-term costs), set a higher deductible amount (short-term costs). For the lowest monthly payment, set the highest deductible amount. But, you’ll pay the most out-of-pocket for claims.
Examples: With a $1,000 deductible, you’ll have lower monthly payments. With a $2,000 deductible, you might have the lowest monthly payments.
Want a lower deductible amount?
To lower your deductible (short-term costs), you’ll have higher monthly payments (long-term costs). For the lowest deductible, you’ll likely have the highest monthly payments. But, you’ll pay the least amount out-of-pocket.
Examples: With a $500 deductible, you’ll have higher monthly payments. With a zero dollar or $250 deductible, you’ll likely have the highest monthly payments.
Is it Safe to Raise Your Deductible?
Some homeowners prefer lower monthly payments. They also understand that with any claims they file, their monthly premiums will likely increase. Why would the payments go up? A claim makes them costlier or riskier to insurers. Homeowners that have more claims will have higher payments. This is similar to auto insurance. If you’re in more accidents, your insurance will go up. So should you file a claim for every incident? Let’s look at an example.
Say you have a $500 deductible. But, you live in an area prone to wind damage from storms. Your roof is damaged and the bill is $1,000. Yes, you can file a claim and the insurance will pay you $500. You’ll pay the balance out-of-pocket. But, let’s say a second storm hits your home that month and then a third. Now you have three claims. Filing multiple claims will likely raise your premiums. They might go up by 25 percent or higher. Hence, you might need to weigh when to file a claim (or when to relocate).
If you can afford to pay for small damages, your premiums will stay low and you can take advantage of savings for having never filed a claim. Savings can vary from five to 20 percent off. And, what if you have a small, sudden emergency and need to make repairs? Always try to have an emergency fund. And, if you don’t, you can use a credit card or open a home equity line of credit (HELOC) loan.
Never set a high deductible just to have lower payments. If a true emergency results and you don’t have emergency funds to cover your deductible, it can cause financial stress.
Ready to Find the Best Home Insurance Rates?
Set your home insurance based on how much you can afford out-of-pocket for your deductible. But, if you’re looking for lower monthly payments, set a higher deductible. But, keep in mind, the amount will be higher out-of-pocket that you have to pay. Keep an emergency fund to cover your deductible amount. If there’s damage to your home and you don’t have an emergency fund, try a credit card or home equity loan. That way you can keep premiums low and pay less each month. If you need help with home insurance or if you have questions, contact RateSupermarket.ca.
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