Whether you opt for a percentage deductible or are required by your insurer, you could be in for an unpleasant surprise if there is a large loss to your home.
Percentage-based deductibles are growing in popularity with the homeowners’ insurance industry. It’s imperative that homeowners pay careful attention to their home policies and know how percentage deductibles work.
Homeowners Insurance Deductibles
Deductibles have been a mainstay of the insurance contract for decades. They are what you pay for a loss before the insurance company pays your claim. Many insurance companies offer a flat per-claim deductible, which is considered the standard.Common standard deductibles can be $500 to $1,000, according to the Insurance Information Institute.
There also are percentage deductibles. The percentage of the deductible amount you pay depends on the policy limits. Depending on the peril, a percentage deductible could run from one to 25 percent of your home’s value, according to Experian.
Deductibles only apply toward property damage. They don’t apply toward liability claims.
How Do Percentage Deductibles Work?
The most common percentage deductibles are 1–10 percent, while disaster deductibles range from 1–25 percent per claim.If you have a 1 percent deductible on a $200,000 home, you will have a $2,000 deductible.
So, if the loss were $10,000, insurance would cover $8,000, and you would have to pay the first $2,000. But if you had a $2,500 loss on a $200,000 home, with a 1 percent or $2,000 deductible, insurance would only pay $500. That’s because you are responsible for the first $2,000.
How Often Do You Pay a Deductible?
All deductibles are applied per claim. So, if you had three claims in a calendar year, you would have three deductibles to pay. But there are some exceptions. For example, Florida homeowners must pay only one hurricane deductible per calendar year, even if they file multiple hurricane-related claims.However, when two lines of coverage are affected, only one deductible applies. For example, you may have a 5 percent wind/hail deductible and a $1,000 other perils deductible. If you have a $500,000 home and a tornado damaged your roof and allowed rain to damage your contents, you will have to pay the 5 percent or $25,000 deductible for the wind damage, but not the $1,000 deductible on the contents.
Deductibles for Specific Perils
You may notice a percentage deductible on your policy’s declaration page, but in higher-risk areas, note the special perils deductibles. Each peril has its own deductible rules.Hurricane Deductibles Have Specified Triggers
In hurricane-prone states, you may have special deductibles when the cause of damage is attributable to a hurricane. A specific trigger established by the insurer must occur for the hurricane deductible to apply to the claim.The triggers vary by state and insurer. They usually apply when the National Weather Service (NWS) officially names a tropical storm, declares a hurricane watch or warning, and defines a hurricane’s intensity in terms of wind speed.
If a windstorm that hadn’t been officially declared by the NWS occurred, you would not have the hurricane deductible. You would have the wind deductible if your policy had one.
Hurricane deductibles typically are higher than other homeowners’ policies. They usually are a percentage of the policy limits. In high-risk coastal areas, insurers may make the percentage deductible mandatory. According to Pure Insurance, a hurricane deductible can be as high as 25 percent.
Wind and Hail Deductibles
Wind and hail deductibles are similar to hurricane deductibles. They are most common in places that typically experience severe windstorms and hail. These include the Midwestern states and areas around Tornado Alley. According to the Insurance Information Institute, a wind and hail deductible typically runs from 1–5 percent of the policy limits.Flood Insurance Offers Several Deductibles
Flood insurance deductibles vary by state and insurance company; they typically are available in dollar amounts or percentages. You also can choose separate deductibles for the structure and contents of your home. Your mortgage company may require a deductible of a certain amount to ensure you can pay.Earthquake Insurance Percentage Deductible
Depending on your location, earthquake insurance deductibles range from five percent to 25 percent of your home’s replacement value.According to the Insurance Information Institute, states with higher than average risk of earthquakes, such as Washington, Nevada, and Utah, have set deductible minimums of around 10 percent.
The basic California Earthquake Authority policy includes a 15 percent deductible of the replacement cost of the main structure. Deductibles start at 10 percent for additional coverages like garages or other outbuildings.
Why Insurers Require Deductibles
Deductibles are a form of risk sharing between you and the insurer. They eliminate small claims that are costly to handle. Deductibles also encourage homeowners to guard against risks. And, finally, they help keep insurance premiums down.Some homeowners deliberately choose a higher deductible to lower their insurance premiums. Higher deductibles lower the insurer’s exposure, which can lead to lower rates.
The views and opinions expressed are those of the authors. They are meant for general informational purposes only and should not be construed or interpreted as a recommendation or solicitation. NTD does not provide investment, tax, legal, financial planning, estate planning, or any other personal finance advice. NTD holds no liability for the accuracy or timeliness of the information provided.
From The Epoch Times