Your home is likely the biggest investment you’ll ever make. Even if you’re still paying a mortgage, you need to protect every dime you’ve put into it. You can do that through homeowner’s insurance, which covers you if your home is struck by fire, storm damage, burglary, or a number of other damaging events.
But your homeowner’s policy won’t reimburse you in full after one of these events.
You’ll likely have a basic deductible of at least $500. That means if a big storm rolls through, causing $3,000 in damage, your insurance company will write you a check for $2,500. Lower deductibles can cost you more in premiums, though, so many experts advise higher deductibles to save a bit more each month. But how much is the right amount?
How Deductibles Influence Premiums
To help homeowners decide on a premium amount, ValuePenguin took a look at how basic deductibles affected insurance costs. They found that even a 0.5 percent increase in deductible ($1,000 to $2,000) could push annual premiums down by 10 percent. In general, each 1 percent increase could boost your rates about 4 to 8 percent.
Instead of setting a $500 deductible, you would be better off increasing that amount and putting that extra money in the bank. However, the problem is that many homeowners simply don’t have money set aside for an emergency. One survey showed that only one-fourth of Canadians have a rainy-day fund, which means there might not be money to spare.
Another factor to consider is that claims free discounts are available on home insurance policies for those that go a number of years without making a claim. These discounts can go as high as 20% and can pose a significant savings on your premium. Making a claim removes this discount and making smaller claims often does not outweigh the rise in insurance premiums.
Considering Personal Loss
Although premiums may go up with a reduced deductible, homeowners should also consider their specific circumstances. If you’re paying $100 a month for homeowner’s premiums, even a 10 percent increase would only be $10 a month. On the flip side, if you put that money in the bank, you’d likely only earn 1 to 2 percent interest, which would only be $0.10 to $0.20 each month.
The best way to determine a deductible is to think about how much you could afford if any sort of disaster happened. If you have $1,000-$5,000 in the bank that you could easily spare, then a deductible in that range would likely work fine.
Other Types of Home Insurance
When determining a deductible, you should also find out what your policy doesn’t cover. Homeowner’s policies don’t automatically cover mass destruction events like floods or earthquakes. However, additional coverage may be purchased by way of endorsements to add these coverages.
It is important to note that these coverages often have separate deductibles which are often higher than the basic deductible discussed earlier. For example, earthquake deductibles are typically a percentage of the total replacement value of your home and/or contents and can be quite high. 10% of a home valued at $500k means that you would have a deductible of $50k. This is not a small figure and in the event of a big shake damaging your home, you may have to obtain financing just to rebuild your home.
In some cases, coverage for these types of losses may have a sub-limit of coverage to keep the cost of the coverage down. It is also important to note that not all areas of Canada have the same exposure to these types of events. Therefore, it is important for you to meet with an insurance broker to discuss and review the exposures to your specific location.
Homeowner’s insurance can help you sleep a little better at night, knowing your home is protected. But you may not need the lowest deductible, depending on how much you can afford to shell out in an emergency. You can price several policies and see just how much you can save by increasing your deductible by $500 or even thousands of dollars and determine whether it’s worth it.