Once you understand how a deductible works and the cost of a deductible you can afford, the next step is to consider both types of deductibles: dollar-amount and percentage-based. For most people, it makes little or no difference which they choose. There is a small number of of homeowners that might find one type is better suited for them than the other. This guide with explain the difference between the two and help you choose one. It will also touch on some special deductibles within policies for endorsements, floaters and specific perils such as hurricanes.
Dollar-Amount vs. Percentage-Based Deductibles
Dollar-amount deductibles are a set amount chosen by a policyholder when they purchase a home insurance policy. If you have a dollar-amount deductible, you pay that share of any claim you make as a policyholder, no matter the amount of the claim. They are the most common type of deductible and the amounts people choose vary greatly. Most home insurance policies have a $500 or $1,000 deductible but they can be as high as $100,000 for a $5 million home, for example. It's a convenient and fixed number people can easily remember when they're filing their claims.
Percentage-based deductibles are based on a percentage of the estimated replacement cost of the covered home. For example, say you purchase a home insurance policy to cover a house valued at $250,000. If you have a 1 percent deductible with the policy, you would cover $2,500 of the cost anytime you file a claim. The replacement cost of your home can differ each time you renew or buy a policy, as will the resulting dollar value of your percentage share. It's just another thing to keep in mind when you receive your insurance check.
Choosing a Dollar-Amount or Percentage-Based Deductible
Insurance companies are beginning to phase out dollar-amount deductibles and move toward a business model using only percentage-based deductibles. The reason for the change is to encourage homeowners to assume more of their own financial risk and to deter abuse of the policies.
Why Homeowners Might Prefer Dollar-Amount Deductibles
Those with more expensive homes and lower dollar-amount deductibles can potentially abuse their policy by making large claims and paying little out of pocket. For example, wind or hail might damage part of a roof and a policyholder will file a claim for an entire new one. They end up paying only $1,000 for a roof that might cost $15,000 to replace. Occasional claims are fine - that’s what insurance is there for - but filing claims habitually to maintain or make changes to a home is abusing a policy and consequently, driving up the cost of insurance for that individual and the carrier’s network.
Until the day comes where your insurance company only offers percent-based deductibles, it might be in your interest to take advantage of a low dollar-amount deductible in the event you have to file a claim. Just bear in mind that the more claims you file, the more you will cost any company to insure, and subsequently, the higher your overall premiums.
For example, for a home with a replacement cost value of $250,000 or less, the cost of a 1% and dollar amount deductible tends to be within the same range. But if the replacement cost value of your home is between $250,000 and $1 million, your 1% deductible could be anywhere between $2,500 and $10,000. A dollar-amount deductible might be preferable for the latter group of homeowners because they could choose a much lower deductible. For example, say you have a $500,000 home and don’t want a deductible more than $2,000. Even a 1% deductible for a $500,000 home would be $5,000 - well more than that homeowners target. So if they were set on a $2,000 deductible, they would have to choose that dollar amount.
Why Homeowners Might Prefer Percentage-Based Deductibles
Those who own a home valued at $1 million or more should aim to pay for most of their repairs out-of-pocket. To make the high premiums to insure such homes as affordable as possible, those homeowners should choose a high deductible. They can likely afford to pay out-of-pocket for many repairs and there is another incentive for them to avoid filing claims. Remember, filing any claim will likely increase the cost of your premiums and filing multiple claims can result in an increase as much as 20% or more. Depending on the cost of your deductible and your premium, that could be a substantial amount of money.
It also might be advantageous for you to choose a percentage-based deductible over a dollar-amount if you are interested in increasing your deductible by a small amount. For example, say you have a $1,000 dollar-amount deductible for a $150,000 home. If you want to increase your deductible, and lower the cost of your monthly premiums, the next highest dollar-amount deductible might be $2,500 - an amount you might not be comfortable with. In this situation, assuming your insurer offers it, you could choose a percentage-based deductible of 1 percent. Your deductible would then be $1,500 - an amount higher than what you previously had but still within what you feel comfortable paying.
Remember, a percentage-based deductible is not determined by the cost of damages or a loss, or the market value of a home. It is based on a percentage of the estimated replacement cost of a home. The actual dollar amount the percentage equates to can be a moving target from year to year if your replacement cost changes.
Deductibles for Floaters and Endorsements
In addition to the structure itself, homeowners insurance covers your personal belongings. Just like your home has a claim limit and deductible, categories of personal belongings also have deductibles and claim limits. When you purchase your home insurance policy, make sure you are familiar with the details of the coverage. Depending on the the value of your belongings, you might need to add an endorsement to or purchase a floater policy for your homeowners policy. Each is a method of extending the coverage of personal items, and if you extend the coverage, your deductible for that category will likely increase.
For example, say you have a diamond ring valued at $10,000. Most standard home insurance policies have a jewelry category limit between $1,000 and $2,000 and you would need to purchase a floater policy to cover the ring. Consequently, the deductible for the increased coverage would also increase.
Hurricane and Windstorm Deductibles
In most states, hurricanes and windstorm claims are treated like those filed for any of the other 16 common perils. In 19 states and the District of Columbia, insurance companies usually have a separate deductible for hurricanes and windstorms because they are at higher risk of damages from them.
The hurricane and windstorm deductible in the states below and in Washington D.C. can be either a dollar-amount or a percentage-based deductible. Which type implemented is decided by the individual company. Each state and company also has its own definition of what is called a “trigger,” or an event that needs to happen in order for the separate deductible to apply. For example, some state triggers don’t apply unless a storm is declared a hurricane by the National Weather Service. Others triggers, such as those in Connecticut, by law don’t apply unless the National Weather Service declares a hurricane and records winds in the state at or exceeding 74 miles per hour.
If you live in one of the states listed below or the District of Columbia and are purchasing a homeowners insurance policy, make sure you are aware if your policy has a separate deductible for hurricanes and windstorms. Unlike the deductible for other perils, you typically cannot choose the cost of the separate deductible for hurricanes or windstorms in these states. Your deductible in this circumstance is determined by your insurer, unless you live in the state of Florida, which dictates the rates.
States with Separate Hurricane & Windstorm Deductibles
|Louisiana||New Jersey||South Carolina|