Should You Increase Your Homeowners Insurance Deductible?
Is increasing the deductible on your homeowners insurance policy a good financial strategy? Many financial experts believe that it is. Here's why: The higher your deductible, the lower your premium. Think of it this way, since you are taking on more risk, your home insurance will cost less. So, should you increase your homeowners insurance deductible?
To begin, let's start with the basics. The deductible is the the amount of money that you, the policy holder, have to pay out-of-pocket before the insurance company starts paying. In other words, your deductible is the predetermined amount the insurance company "deducts" from the total bill and you pay that amount. For instance, let's say that you file a claim that your insurer accepts for $4,000 and your deductible is $250. The insurance company will pay $3,750 ($4,000 - $250) and you will pay $250.
Be sure not to confuse the deductible with the premium. An insurance policy's premium is the amount you, the policyholder, pay monthly, semi-annualy, or annualy to keep the policy in force.
The majority of deductibles on homeowners policies begin at $250. Simply by increasing this deductible to $500, you can often save 10 percent on your premium. By increasing your deductible to $1,000, you may be able to double that. Below is a list of deductibles and potential savings:
If you increase your deductible from $250 to:
$500 you could save up to 12%
$1,000 you could save up to 24%
$2,500 you could save up to 30%
$5,000 you could save up to 37%
While increasing your deductible will save you money on your premium, make sure that you are going to be able to afford to pay the higher deductible if you have to make a claim. Remember, the reason you have homeowners insurance is to safeguard you from an unforeseen event that damages your home and/or its contents. Having a deductible that is too high will negate the benefits of having insurance in the first place since you are personally assuming too much of the risk.
If you are like most people and believe that insurance should only be used for serious losses, then it makes sense for you to increase your homeowners insurance deductible and pay relatively small claims. Let me tell you why this is the case. Anytime you file a claim, it will negatively affect your risk profile and your premium will go up. If you can maintain a perfect no-claim record by not asking your insurer to pay small claims, your premiums will remain low and you will have a much easier time renewing your homeowners insurance policy when the time comes. The strategy here is to strictly use your insurance for major claims that you could not possibly cope with or afford on your own.
If you decide to increase your homeowners insurance deductible, you should consider using a portion of your premium savings to safeguard your home and possessions. Invest in improving the security of your home by adding things like smoke detectors, a burglar alarm, or dead-bolt locks. Often, these kinds of improvements make you eligible for a discount of 5 percent on the cost of your policy. Some companies even offer to reduce your premium by as much as 15 or 20 percent if you install a sophisticated sprinkler system and a fire and burglar alarm that rings at the police station or other monitoring facility. However, these systems are not cheap and not every system qualifies for the discount. Before you buy such a system, be certain that you find out what kind your insurer recommends, how much the device would cost, and how much you would save on premiums.
If you are going to increase your homeowners insurance deductible, you will also want to check to make sure that your insurance company is giving you a competitive reduction on your premium. This question is an important one to ask. You can use the list of deductibles and potential savings previously mentioned above as a rough guide to the premium reduction you should get. This is assuming, of course, that nothing else in your policy changes. Be sure you do the math or else have the insurance company's sales representative do it for you.
Another way that you can reduce your premium is to lower the coverage limit of your homeowners insurance policy. The coverage limit of your policy is the maximum the insurer will pay for what is insured. If you do decide to lower the coverage limit, be certain that the lower coverage limit adequately protects your home and contents.
Now that you have the aforementioned information, should you increase your homeowners insurance deductible? While increasing the deductible on your homeowners insurance policy is generally a good financial strategy, every situation is different and it must be left to the individual home owner to decide for him or herself whether or not to do it.
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