Balancing Deductibles and Premiums to Save on Home Insurance Costs

By Bethany Harris on April 12th, 2010

Homeowners Insurance

It is important to shield your home against loss with a home insurance policy, but you also want to make sure you get the most affordable home insurance possible. A number of factors affect what you pay for your home insurance policy, including the amount of your deductible.

Homeowners Insurance Premiums and Deductibles

The cost of your policy is called your insurance premium. Your home insurance premium is determined by many factors, including the territory in which you live, the coverage you purchase, your policy limits, and the amount of your deductible.

A deductible is the amount of money you pay out of your own pocket before the insurance company begins to provide coverage for a claim. Your home insurance deductible can be a specified dollar amount, such as $1000, or a percentage of the claim amount.

Using Your Deductible to Save Money

In the event of a claim, your policy outlines the limits of protection once your deductible is met. One way to reduce your premium payment is to increase the amount of your deductible. According to the Insurance Information Institute (III), increasing your deductible from $500 to $1,000 may save you as much as 25 percent on your premium payments.

There are two primary reasons that an increased deductible may decrease the amount you pay for home insurance. First, higher deductibles decreases the amount of money the insurance carrier must pay in the event of a claim. Second, higher deductibles lessen the number of small claims that you file, thus reducing the risk of paying out on a claim.

However, before you increase the amount of your deductible, you should determine how much cash you can afford to come up with should you have to file a claim. Depending on your financial circumstances, you may want to pay a little more on your premiums now and keep your lower deductible.

Percentage Deductibles

Deductibles can also be based on a percentage. This type of deductible is often called a catastrophe deductible and is seen in policies that provide coverage for disaster such as floods or earthquakes.

In such a case, the deductible is a percentage of the insured value of the structure, rather than a specific dollar amount. For example, according to the III, percentage deductibles for windstorm losses vary from 1-15 percent of a home's insured value. By opting to pay a higher percentage deductible when you file a claim, you can lower your premium payments.

Increased Deductibles Can Reduce Premiums

To save money on your home insurance costs, consider increasing your policy deductible. But remember, you are responsible for a portion of your claim, up to your deducible amount, so be sure you select a deductible you can afford.

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