Homeowners Insurance: Balancing Deductibles and Premiums

When you are in the market for homeowners insurance, many options are available to choose between for the levels of coverage you will carry. Ensuring adequate levels of coverage is the key to responsible homeownership, but you must also make intelligent selections over what you will pay to your insurance company on a regular basis versus what you will pay whenever there is an occurrence in your home necessitating the use of your policy. Ensure that your deductibles and premiums are adequately balanced, and your pocketbook will benefit greatly!

First, what is your premium and what does it cover? Simply put, the premium on your homeowners insurance is that amount you pay on either a monthly, quarterly or annual basis. It is calculated as a percentage of the coverage you carry on your home. Your payments may be set up to be a part of your mortgage payment, and are then paid to your insurance company from an escrow account. You may also pay your premiums directly to your insurance company. Generally, the higher the coverage you maintain on your home, the higher your premiums will be. In the same way, the lower your deductible, the higher your premium will be – under the theory of more now, less later.

Second, what is your deductible, and what does it cover? The deductible on your homeowners insurance policy is that amount you pay every single time an occurrence at your home necessitates the use of your policy. Deductibles can be calculated as either a set dollar amount of a percentage per incident. The deductible generally has no tie in with the amount of coverage you carry on your home; it is simply the amount you have decided you can afford to pay out-of-pocket every time your insurance is necessary to cover an occurrence.

When balancing the amount of your deductible versus the amount your premium costs on a regular basis, you must consider several factors. First, consider that the average homeowner makes only one claim on their homeowners insurance policy every five years. That is not very often! Keeping this statistic in mind, balance out what a higher deductible may cost if paid only every five years, versus the corresponding amount your premium would be reduced by if you carry a higher deductible. If saving money is your goal, it may very well benefit you to carry a higher deductible and save money on your premiums in the meantime.

Next, consider your household budget. While it may be beneficial for you to reduce recurring costs by lowering your premium while raising your deductible, this may not be practical to your overall budget. If you raise your premium to, say, $1000, is that a reasonable amount you can come up with on a moment’s notice to pay out if it is necessary to use your homeowners insurance policy to cover a claim? Many households do not have this amount of money available and on-hand in an instant, so to ensure that you can contribute your portion of a claim when necessary, carrying a lower deductible while paying more on a monthly basis may be more practical to your household.

Finally, try to use foresight to anticipate what types of claims might be necessary for your home. Ask the prior owner’s if they’ve ever had to use their policies for protection. Look at the current structural integrity of your home. Evaluate what risks might be inherent. It’s impossible to see the future, but rational guesses can be made that can bring benefit to your budget. Always look at your homeowners insurance policy as a balancing act – balancing the right amount of coverage with expenses that fit the finances unique to your home.