Homeowners Insurance Deductible – What Does It Cover?

Understanding your home insurance deductible can help you decide how best to protect what may be the most expensive purchase you ever make. Unfortunately, it’s not always easy to understand your policy’s fine print. Keep reading to learn how a homeowners deductible works, how it affects your premium, and how much of a deductible you may need.

What Is a Home Insurance Deductible?

Simply put, a home insurance deductible is the amount that a homeowner must pay before their insurance steps in to cover the remaining expenses on a claim. The deductible is expressed as a fixed dollar amount – usually $500 to $2,000, but it can be higher – or as a percentage of the home’s insured value. With homeowners insurance, the deductible applies each time you file a claim. Typically, insurers will subtract your deductible from the settlement amount when they issue payment.

Homeowners can choose a deductible amount when taking out a new policy and can change that figure at any time. When deciding what amount works best for you, consider the financial implications of your decision. A high deductible means you’ll likely get a lower insurance rate, but it also means you will need to cover more expenses out of pocket before insurance pays the rest.

How Does a Home Insurance Deductible Work?

After you file a claim, your insurance company will send an adjuster to assess the damage and determine if it’s covered under your policy and how much repairs will cost. If the adjuster estimates that $7,000 worth of damage occurred and your deductible is $2,500, your insurance company will reimburse you $4,500.

What Kinds of Deductibles Are There?

The two most common kinds of home insurance deductibles are:

• Flat or dollar amount. These use a specific dollar amount that you need to cover when filing a claim. This amount varies among insurers and policies, but expect a minimum deductible of $500 to $1,000, according to the Insurance Information Institute (III). 
• Percentage-based. These use your home’s insurance value and a mutually agreed percentage to determine the dollar amount owed when filing a claim. For instance, a homeowner who insures their dwelling for $250,000 and has a 2% deductible will need to pay a $5,000 deductible before insurance kicks in.

Less common are split deductibles, also known as hybrids, which combine the principles of both flat and percentage-based deductibles depending on the type of damage.

What Is a Disaster Deductible?

Standard homeowners insurance policies usually cover damage caused by perils such as lightning, fire, wind, and hail. Earthquakes and floods are excluded, requiring separate or add-on coverage. Depending on where you live and the policy you hold (including add-ons), your homeowners insurance may include:

• Hurricane disaster deductibles are required in many Atlantic and Gulf Coast states where hurricanes frequently occur. These are usually percentage-based and can range from 2% to 10% of the home’s insured value, depending on your insurer and state of residence. 
• Hail and windstorm deductibles are common in Midwestern and Plains states where tornadoes and other storms occur. Deductibles typically range from 1% to 5%.
• Earthquake insurance is sold in California, the Pacific Northwest, and other states with high occurrences of earthquakes. Most insurers use a percentage-based deductible that can range from 10 % to 20%, though some policies may offer a lower percentage rate.
• Flood insurance deductibles may be either a set dollar amount or a percentage and they can vary substantially based on location and provider. Flood policies usually carry separate deductible amounts for the physical dwelling and your home’s contents.

FAQ

What is the standard homeowners insurance deductible?

While there’s no one right answer to how high or low your deductible should be, amounts typically range between $500 and $2,000. Some insurers offer higher deductibles of $5,000 or more.

Does my deductible affect my home insurance rates?

Yes, absolutely. The general rule is that the higher your deductible, the lower your insurance rate, and vice-versa. A homeowner with a $5,000 deductible will pay less than if they have a $500 deductible, as the insurance company is taking on a higher level of financial risk if they file a claim.

Is home insurance tax deductible?

In most cases, you cannot deduct the cost of homeowners insurance on your primary residence from your income taxes, according to the Internal Revenue Service (IRS). However, you may be able to take a deduction for premiums paid on a rental property you own as an investment. You may also qualify for a tax deduction if you are self-employed and work out of your home.

Allowed deductions include local and/or state real estate taxes, qualified home mortgage interest, and private mortgage insurance (PMI). Talk with a tax expert to find out what home-related deductions you may qualify for.

Can I waive my home insurance deductible?

It depends on the insurer. Some offer policies that contain clauses known as waivers of deductible. These waivers specify circumstances when you won’t have to pay your deductible, such as a house fire that consumes the entire structure and its contents.

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