As an insurance agency owner of 18 years, I have historically been an advocate of keeping deductibles as high as financially feasible for my clients. I did not want them to have a deductible higher than they could reasonably expect to afford. Now we find ourselves in a generational hard market in which carriers are expected to increase their minimum deductible requirements substantially. In light of this it is important to consider the pros and cons of choosing a higher deductible. While many homeowners may be inclined to opt for lower deductibles to minimize out-of-pocket expenses in the event of a claim, there are significant advantages to considering higher home insurance deductibles. Let’s explore the benefits and downsides of this financial strategy.
- 1. Monthly Premium Savings:
One of the most compelling benefits of choosing a higher home insurance deductible is the potential for significant savings on monthly premiums. Insurance companies reward policyholders who are willing to take on a higher portion of the risk by offering lower monthly costs. This can translate to substantial savings over the long term, putting more money back into the homeowner’s pocket.
- 2. Financial Responsibility and Incentive for Preventive Measures:
Opting for a higher deductible creates more financial responsibility among homeowners. Knowing that a larger portion of the loss is their responsibility encourages individuals to take preventive measures to protect their homes against potential risks. This may include installing security systems, upgrading fire safety measures, or implementing weather-resistant modifications, ultimately reducing the likelihood of filing a claim.
- 3. Protection Against Frequent Claims:
Higher deductibles act as a deterrent against frequent, small claims. Home insurance is designed to cover significant losses, and filing numerous small claims can result in increased premiums or policy non-renewal, especially in today’s insurance market. By choosing a higher deductible, homeowners are more likely to handle minor incidents on their own, preserving their insurance for more substantial and costly events.
Downsides to Consider
- 1. Financial Strain in the Event of a Claim:
The most apparent downside to a higher home insurance deductible is the potential financial strain in the event of a claim. Homeowners must be prepared to cover the deductible out of pocket before their insurance kicks in. For those living paycheck to paycheck, this may present a considerable challenge, potentially leading to delayed repairs or financial hardship. This issue can be overcome with planning and savings to a degree.
- 2. Limited Appeal for High-Risk Individuals:
Higher deductibles are most advantageous for homeowners in low-risk areas or those with robust risk mitigation strategies. For individuals living in high-risk regions or properties prone to frequent claims, the financial benefits of lower premiums may be outweighed by the increased likelihood of filing claims with substantial out-of-pocket costs.
- 3. Potential Impact on Home Resale Value:
Some potential buyers may be deterred by a home with a history of high insurance deductibles because there may be a potential to delay repairs. While this may not be a deal-breaker for all, it’s essential to consider the potential impact on resale value. A home with a history of claims and high deductibles may also be perceived as a higher-risk investment.
In conclusion, the decision to opt for higher home insurance deductibles involves a careful consideration of personal financial circumstances, risk tolerance, and the home’s location. While the potential for premium savings and increased financial responsibility are attractive, homeowners must weigh these benefits against the potential downsides, ensuring that the chosen deductible aligns with their unique needs and circumstances.
Heading into the next year insurance carriers are looking for ways to reduce their loss ratios and higher deductibles, particularly wind and hail deductibles on the Front Range of Colorado, are going to be a reality. It is more important now than ever to have a conversation with your insurance agent about how your deductible could impact your coverage decision.