I bought my first house and my first home insurance policy in 1982. That policy had only one deductible and it addressed everything – water leaks, wind, hail, fire, theft, etc. The biggest decision I had to make was would it be $100, $250, $500 or $1,000. Sounds a bit like the deductibles on your car insurance policy doesn’t it? Actually, they weren’t all that much different.
About 10 years ago, most insurers had one policy deductible that covered everything and it was a dollar amount, typically somewhere between $250 and $1,000. Today there are between two and three deductibles and they are usually percentages as opposed to dollar amounts. Home policies began to evolve as insurers were hit with more hail related claims. That led to the 2 deductible policy with,
- One deductible for wind & hail
- One deductible for everything else
Texas home insurance policies began to change after Hurricane Katrina in 2005 as some insurers now have adopted 3 deductibles for home policies,
- A separate deductible for hurricane (tropical cyclone)
- Wind / hail
- Everything else
Not every insurer has three deductibles. Many still maintain two and incorporate hurricane into wind/hail.
In addition to the number of deductibles increasing, most insurers changed from dollar based deductibles ($500 or $1,000) to percentage based deductibles.
- These deductibles range from 1% to as much as 5%
- They are a percentage of the home’s dwelling amount, the amount a home is insured for
- So a home that’s insured for $200,000 would have a $2,000 deductible at 1%, $4,000 deductible at 2% and so on
- Most mortgage companies strongly prefer the deductible to be either 1% or 2%
The impact of the deductible is the same as when they were dollar amounts,
- The lower the deductible, the higher the premium
- The higher the deductible, the lower the premium
In the past few years, some insurers have changed their policy deductibles.
- Most still maintain a wind/hail deductible at 1%
- Many allow a lower deductible ranging from $1,000 to $5,000 on everything else
What’s the right one for you? I encourage people to consider two things,
- What best fits your budget
- How long do you have to go claim free to pay for the difference between a $1,000 and a 1% or a 1% and a 2% (or higher) deductible
If you maintain an emergency fund you may be able to go with a higher deductible. If not, or it takes more than three years to cash flow the difference, go with the lower deductible. Before any change though, make sure your mortgage company will approve it.
Have a thought or suggestion? Post it on our Facebook page at on.fb.me/MgrcXK or in our comments section. If you have a GE dishwasher, check back with us on Wednesday as we look at a potential fire hazard.