What’s the Difference Between High and Low Deductible Homeowners Insurance?

Homeowners insurance is a vital part of owning a home, but insurance options can be confusing—to say the least. It might be tempting to sign up for the insurance policy with the lowest monthly premium and check that item off your to-do list. 

However, you want to ensure that you choose the deductible option that works best for your home and budget. Start by getting to know your homeowners insurance policy options to decide what type of coverage is best for your house.

Low-Deductible Home Insurance Pros and Cons

If you set a low deductible for your homeowners insurance, you can expect to pay more for your insurance premium. 

For example, this type of insurance policy might have a deductible of $1,000. If you make a claim, you only have to pay $1,000 out of pocket. In contrast, with a high-deductible policy, you might have to come up with a percentage of the total cost of repairs, which is unpredictable. Let’s take a look at some of the pros and cons of this deductible decision.

Pros of Low-Deductible Home Insurance

• Pay less out of pocket for claims: If you file a homeowners insurance claim in the event of a fire or other disaster, you’ll pay less out of pocket with a low-deductible policy. This feature is the primary benefit of this type of insurance deductible.

• Higher policy limits: Low-deductible policies typically have higher policy limits than high-deductible policies, meaning you may receive a bigger payout after filing the claim.

Cons 

• Pay more in premiums: You can expect to pay a higher monthly premium with a low-deductible homeowners insurance policy. 

• May spend more than needed: The flip side of a higher premium is that you could spend more than you need to—if you don’t sustain damage in a given year—because you pay the higher amount whether you have a claim or not.

High-Deductible Home Insurance Pros and Cons

On the other hand, high-deductible policies have more out-of-pocket expenses but lower monthly premiums. When shopping for home insurance, it’s common to have sticker shock. A plan with a higher deductible can help ease the sticker shock and provide coverage in case of a catastrophe. Check out some of the pros and cons of this deductible type.

Pros

• Pay less in premiums: You can expect to pay less in monthly premiums than you would with a low-deductible homeowners insurance policy. One strategy is to put your deductible savings in an emergency account. That way, if something happens to your house, you have some cash on hand to pay for the deductible, or your share of the repairs. 

• Stabilized rate: With this type of deductible, your premium rate won’t increase as much after filing a home insurance claim.

Cons

• Pay more out of pocket for claims: The major downside of a high-deductible policy is that if you file a claim, you have to cough up the initial funds to repair it before your insurance kicks in. Depending on your policy, this could be several thousand dollars. Without knowing what could go wrong, it’s tough to estimate how much it will cost and how much is reasonable to save.

• Weigh the cost of claims: Since you have to cover any expenses below your deductible out of pocket, many homeowners struggle to determine when it’s worth filing an insurance claim. Not filing for small claims will save some time and paperwork, but it could hurt in the longer term. On the other hand, filing too many claims can prompt your insurance company to raise your rates the following year or even decline to renew your policy.

Low-Deductible Insurance Vs. High-Deductible Insurance

Take a look at how low versus high deductible insurance compare to each other. 

Price

It can be difficult to determine the amount of insurance coverage you need for your home. Unless you have a crystal ball or a really good fortune teller, it’s tough to know what will happen in the year ahead. However, it’s accurate to say that low-deductible home insurance plans cost more in the long term than high-deductible plans.

If no major accidents occur at your place, you’ll most likely come out ahead if you opt for high-deductible homeowners insurance. This option has the lowest premium rates, and if you save what you would have spent for a policy with a lower deductible, you’ll create a nice cushion in your savings account for future claims.

Of course, if you have an incident at home, you might wish you had a low-deductible policy. An insurance broker can help you determine the coverage you need and help you find strategies to save on home insurance.

Most affordable insurance: High-deductible plans 

Additional Insurance Definitions to Know

To compare insurance policies, you need to know the lingo. Here are some terms you’re likely to encounter.

Claim

An insurance claim is how you officially notify the insurance company of an incident resulting in damages. Filing a home insurance claim indicates that you’re requesting payment for the cost of the associated repairs. 

Actual Value

Your insurance company will either cover the actual value or the replacement cost of items in your home or materials to rebuild your home.  Actual value is the depreciated value of the item or how much you would pay for that actual item on the day you need to replace it.

For example, if your 9-year-old washing machine is damaged in a covered incident, the amount on the check you receive from the insurance company would be roughly the amount you could sell that appliance for on a resale site. 

Replacement Cost

Replacement cost covers the materials or items in your house at the price it would cost to replace today. This type of policy helps to replace or repair the covered item without deducting for depreciation.

Premium

An insurance policy premium is the amount you pay to be covered on the policy. Depending on your arrangement, you might pay monthly, quarterly, twice-yearly, or once per year.