How Deductibles Relate to Your Homeowners Coverage

A homeowners insurance deductible is a form of risk sharing. If a covered event occurs, you agree to pay a portion of the cost while your insurance company foots the bill for the rest. 

Accepting a larger share of the risk (by agreeing to a larger deductible) could result in a lower premium. However, if the unthinkable happens, you must have the funds available to cover that amount. 

How Do Homeowners Insurance Deductibles Work?

A homeowners insurance policy protects you if a covered event, such as a kitchen fire or burglary, takes place. A deductible helps you share financial risks with your insurance company. You agree to pay some of the damages upfront before coverage kicks in, and they reward you with smaller premiums. 

In most cases, the insurance company will subtract the deductible amount when cutting a check for a claim. 

Understanding the Different Types of Deductibles 

While all homeowners insurance policy deductibles involve you paying part of a covered claim, your portion can vary depending on the type of deductible you accept. The two main types of deductibles are fixed dollar and percentage. 

Here are the key differences between these policies:

• Fixed deductible: You agree to a specific dollar amount for your deductible. It doesn’t change, even if your home becomes more valuable with time.
• Percentage deductible: You agree to a specific percentage of your home’s value as your deductible. As your home gains in value, so does your final deductible amount. 

The following table can make the differences between the two types of deductibles easier to understand: 

Claim Amount	10% Deductible on $300,000 House — Insurance Company Pays	$1,000 Fixed Deductible — Insurance Company Pays
$1,000	$0	$0
$10,000	$0	$9,000
$100,000	$70,000	$99,000
$300,000	$270,000	$299,000

How Do Deductibles Impact Your Homeowners Insurance Policy?

A percentage deductible is typically less expensive. You’re accepting a larger amount of risk, so your premiums should shrink accordingly. But if a major problem impacts your home, you’ll be at risk of a hefty bill. 

A fixed deductible can be easier to plan for. You’ll know exactly how much you need to keep in your savings account in case something awful happens. But if you choose a small deductible, you could have higher premiums. 

Things to Consider When Choosing Your Policy 

As your insurance broker, agent, or insurance company representative creates your homeowners policy, you may be able to choose between a fixed and a percentage deductible. Neither is inherently better, but one might fit your circumstances perfectly. However, it’s important to note that not all policies offer both options. 

A percentage deductible might be best for you if:

• You’re willing to accept more risk, even during covered events. 
• You want to keep your premiums as low as possible. 
• You have money saved up to cover deductibles if needed. 
• You’re willing to forego claims on small losses.

A fixed deductible might be best for you if:

• You want control over the maximum amount you’ll pay after a covered event. 
• You’re willing to accept a higher premium. 
• You don’t want to set money aside to cover large premiums. 
• You want to submit claims for mild or moderate losses.

Take your time before you sign your insurance policy. Run the math on several types of claims, and think hard about how much you’ll be charged if something goes wrong. Weigh the pros and cons of each scenario to determine which one makes the most sense for your finances. Lisa Koosis, a former claims specialist, says, “Before choosing the deductible for your policy, you should check with your mortgage holder. Many financial companies set a maximum deductible for homeowners to ensure they’ll be able to meet their financial obligations in the event of damage or loss.”

Frequently Asked Questions About Deductibles on Homeowners Coverage

We’ve compiled some of the most frequently asked questions about how deductibles relate to your homeowners coverage. 

High vs. Low Homeowners Insurance Deductible: Which Is Better?

Neither is better than the other. The version that’s right for you depends on your budget, risks, and comfort level. Map out potential scenarios to determine what you may pay out of pocket and assess which works best in your situation. There’s no right answer, but there will be an answer that feels best for you.