Are you ready for a higher home insurance deductible?
Home insurance is one of those "in case" financial products that you can buy. You don't purchase it for immediate use; you purchase it just "in case" you need it someday. It's sort of like keeping those jeans you used to wear and don't fit into anymore, but keep in the back of your closet just "in case" you can wear them again someday. That's the fashion equivalent of home insurance.
What is a home insurance deductible?
There are three main parts to your home insurance policy: the coverage, the premium, and the deductible. The coverage includes all of the particulars and clauses that make up the policy. It tells you which items the policy covers and up to which amount. The premium (usually paid annually or monthly) is the cost of your insurance policy. The insurance deductible is the amount of money that you have to pay out of pocket before the policy coverage kicks in.
If you file an insurance claim for $10,000 in damages and your insurance deductible is $1,000 the insurance company (all variables aside) will refund $9,000 of your costs.
How is my insurance deductible calculated?
Just like any other financial product, there is a mathematical equation that determines the deductible an insurance company is willing to offer with a policy. Of course, it's not a calculation that everyone understands, or wants to take the time to learn.
All you need to know about your home insurance deductible is that the higher the deductible, the lower the premium. If you are shopping around for home insurance and find that the annual premium cost is too high, you can increase your deductible to lower the premium. However, if you have damage to or a theft in your home your out of pocket cost will also be higher. Is that a chance you're willing to take?
You can save money on your monthly premiums, but you have to be prepared to pay out of pocket. If you can go years without a claim, those monthly premium savings can be a big deal.
Why is your deductible increasing?
There are a couple of reasons why deductibles increase within a home insurance policy. If you've had claims in the past, the cost of your insurance will definitely increase. At the same time, the insurance company can also mandate a higher deductible in order to lower their risk. The more you pay out of pocket, the less they have to pay and that's good for the insurance company - although it's not always great for the customer.
The logic is that a higher out of pocket cost will hopefully make clients think twice before filing the next insurance claim. This also applies for people who have less than perfect credit scores. If you are deemed to be less financially responsible (have a lower credit score), the insurance company may not give you the option of choosing between deductibles. Instead, the company may require a minimum amount.
Home insurance is something we all need. Even with a higher insurance deductible, the out of pocket cost will be a lot less than the price to replace all of your personal belongings or rebuild your home if there is structural damage.