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Homeowners insurance protects your dwelling, personal belongings and offers personal liability coverage for injuries on your property. An insurance peril is an event that damages your home or belongings, such as a fire or a storm, that results in a financial loss. Before your insurance company compensates for a claim, you'll need to pay a deductible.
A deductible is an amount the insured must contribute toward a loss claim. It is subtracted, or deducted, from your claim payout.
Your deductible can be a fixed dollar amount or a percentage of the total amount of insurance on your policy. The Insurance Information Institute (III) notes that the standard homeowners deductible costs $500 to $1,000. The declarations page of your insurance policy will state your deductible amount and whether it is a percentage or dollar amount.
Your deductible applies every time you file a claim and only to property damage (dwelling and personal property coverage), not personal liability coverage.
Dollar amount deductible: If your deductible is in the form of a dollar amount, this is subtracted from your claim amount. For example, say a storm damages your home and the insurance company calculates your loss at $15,000 to repair the damage. If your deductible is $500, the insurance company will pay you $14,500.
Percentage-based deductible: If your deductible is a percentage, like 2%, the percentage amount is deducted from your claim. If your house was insured for $500,000 with a 2% deductible, you would have $10,000 deducted from each claim. For example, if you have a $15,000 loss, the insurance company would deduct $10,000 and pay you $5,000.
According to the III, the average annual premium for homeowners insurance in the US in 2019 was $1,272. One way to reduce your premium is to increase your deductible amount.
Having a deductible higher than $1,000 reduces your annual premium. However, if you have a loss and make a claim, you will have a larger portion deducted from your payout. This is an important consideration if your home is located in weather zones or disaster-prone areas — flood zones, hurricanes, tornadoes, wildfires, mudslides, hail, and earthquakes — where you can have multiple claims in a year.
Other things to take into account include:
In addition to your standard homeowners insurance deductible, there are deductibles for windstorm insurance riders, flood insurance, hurricanes, and earthquake insurance.
Flood insurance is in addition to your homeowners insurance policy to cover flood-related damage. Flood insurance is required if you are in a high-risk flood zone. Flood insurance deductibles vary by state and insurance carrier, and your mortgage lender may have specific requirements for your flood deductible, according to the III.
Both tornadoes and hurricanes produce wind and hail. Wind and hail are named insurance perils in standard homeowners policies. However, most insurers require an additional high-coverage windstorm rider and separate deductible if you live near coastal areas or the area in the central US known as Tornado Alley. The III says that wind/hail deductibles are typically 1% to 5%.
Earthquake insurance, also known as "earth movement" coverage, is separate coverage. The Federal Emergency Management Agency (FEMA) has earthquake hazard maps that show the intensity and likelihood of seismic activity across the country. The III says earthquake insurance deductibles range between 2% to 20% percent, averaging around 10%. The California Earthquake Authority (CEA) offers coverage and deductibles vary based on the coverage selected for California residents.
When purchasing homeowners insurance, ask your agent about the various deductibles.
