You have just moved in with your significant other and you decide to combine your auto insurance; you just entered into escrow on your first home, and your agent is reminding you about homeowners insurance. As you start researching online, checking out a few companies, comparing coverages, one pesky thing continually comes up: the deductible.
What’s a Deductible?
A deductible is “a specified amount of money that the insured must pay before an insurance company will pay a claim,” according to Google. When it comes to home and auto insurance, your carrier wants to make sure that you have some “skin in the game” and are incentivized against filing minor or fraudulent claims. This is similar to medical insurance deductibles and co-pays, which force you to pay a portion of those expenses as well.
You can get some major discounts on your premiums if you keep your deductibles high. It can even be up to a 20% savings of total premium to move from the low end of the spectrum to the high (usually between $500 and $5000, though in some cases as little as $100 and as high as $20,000).
Affordable Deductibles are Key
So, if high deductibles keep money in your pocket, why would you have a low deductible? The first and most important possible answer lies in your personal cash flow scenario. If a tree falls on your house or you back into someone in a parking lot, what can you afford immediately (or within 72hrs) to pay out of pocket? That’s a personal question that you can answer in your head, but it is important because your deductible payment comes BEFORE your insurance covers the rest of your claim. This means if you chose a deductible that was too high, you won’t be able to use your insurance and solve your problem. That scenario can be catastrophic.
Auto and Homeowners Insurance Helpful Tip
My suggestion is to use the following example as a rule of thumb when you look over your options. Let’s say your deductible options are $500/$1,000/$2,500/$5,000. If your first instinct is something like, “I want to go with the $2,500 deductible,” then take a pause, (and trust the advice of an insurance agent who has had this conversation and seen the results many times), and select the increment below your initial decision–so instead of $2,500, select $1,000. If you had initially thought $5,000, select $2,500…etc.
Now, this isn’t a one size fits all rule. For example, if you have substantial income or access to emergency funds (like the bank of mom and dad), or if you have experienced the claims-process experience and have used your deductible before, then you may not want to use the rule of thumb above.
On the other hand, if you are a new homeowner, just purchasing home or auto insurance for the first time, or your ability to come up with the deductible you want is remotely uncertain, you should be wary about the upfront savings of a higher deductible for the first few years of insurance ownership and payments. In my experience, you will appreciate a low barrier to using your auto and homeowners insurance in the event of a catastrophe. Even if you have money in the bank, how painful will it be to lose it should you need to?
The logic here—it’s worth $50-$150 more per year when you are in a vulnerable financial state to save $500 or $2,500 dollars in the middle of a terrible situation. I hope that helps, and if you want to have this conversation in person and see what makes sense for you and your family, never hesitate reach out to us online or give us a call: (619) 667-2880