Getting Acquainted with Your Insurance Deductible

When Hurricane Irene came ashore on the East Coast in August 2011, some homeowners were caught by surprise as the possibility of storm damage, and potentially a larger insurance deductible, came into play.

It’s possible that what you don’t know about your homeowners or automobile insurance may cost you one day. Policies are fairly complicated documents laden with industry-specific terms and concepts that may be confusing even to the most sophisticated consumer.

Deductibles are one of the key features of insurance contracts that people may not fully understand. A deductible is the amount of money a policyholder must pay out of pocket before the insurance company pays the covered amount on a claim, up to the policy limits. Having a deductible in place means that the insurer and the insured agree to share the risk according to a predetermined formula.

Understanding the different types of deductibles, and when they may apply, could help reduce your insurance premiums and/or enable you to have the level of protection you may need from your policies.

One Way to Save

Most policyholders do not file claims very often. Therefore, choosing a larger deductible for your homeowners or auto policies may be a way to save money over time and still be protected financially from a major loss that you could not afford to pay for on your own.

With auto insurance, for example, raising the deductible from $200 to $500 may reduce collision and comprehensive coverage premium costs by 15% to 30%, and selecting a $1,000 deductible could save you 40% or more.¹

When Percentages Matter

Standard homeowners policies typically have a flat deductible such as $500 or $1,000. However, in states where there is a greater risk of a major catastrophe, larger deductibles may apply to some forms of coverage.

In certain states, a hurricane may trigger a specific deductible that is set as a fixed percentage of the policy limits. For example, if a property is insured for $200,000 and the policy has a 2% hurricane deductible, then the first $4,000 must be paid by the homeowner.

Earthquake policies typically have deductibles ranging from 2% to 20%, depending on the region’s perceived level of risk. The California Earthquake Authority (CEA) policy available to California residents includes a deductible that is 15% of the replacement cost. A basic policy covers only the house, but more comprehensive coverage that includes other structures may be available for a higher cost.²

Homeowners or automobile policy deductibles typically apply only to property damage. There are generally no deductibles for liability claims that result from an accident or injury that occurs at your home or on the road.

When purchasing a policy, it’s important to ask about deductibles and compare the rates for each of the available options. Your insurance agent can answer any questions you may have and make coverage recommendations based on your personal financial situation, needs, and goals.

1—2) Insurance Information Institute, 2011

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.