What’s the Deal with Deductibles?

Deductibles…we see them on our health insurance and for the most part understand how they work, but when it comes to property insurance, many people are in the dark on deductibles.  So what is the deal, anyway?

You may have noticed when you are shopping for property insurance that choosing a higher deductible helps to keep the premium more affordable, so many people are opting for higher deductibles these days; after all, you’ve never filed a claim, so what’s the point anyway, right?

Well, being informed on this topic is something you really should do.  So here’s the nitty gritty…a deductible is the amount of risk you choose to bear–out of your own pocket–in the (hopefully unlikely) event of ever filing a claim.  In plain English that means you will have to pay the amount equal to your deductible before the insurance carrier has to start paying on your claim

Let’s say for example that you have a deductible of $1,000.  If the fickle finger of fate points your direction and a storm drops a tree on your house, you’d better plan on forking over the first $1,000 toward the repair–which you made sure to set aside just in case, right?  THEN the insurance carrier is on the hook to pay for the balance of the repair (up to the amount of your claim, or the maximum coverage amount you purchased, whichever is less, provided that you bought coverage for a tree falling on your house).

It’s another way of saying you are choosing to self-insure up to the amount of your deductible.

Back in the mid-to-late 1990’s, when I started in the property damage restoration industry, $100 was the average amount for a deductible, and there were a few lucky folks who still had the previously common $50 deductible at that time.  Soon afterward $250 became the norm, followed by $500, and today $1000 and $2000 deductibles are common, while some are even higher.

My advice to everyone is to take a hard look at the deductible you negotiate with your insurance agent at the time you are purchasing your policy.  Let me repeat that….you negotiate the deductible with your insurance agent.  Finding the balance between the cost of your premiums and the amount of the deductible is critical because you want to make sure your budget can manage it at the time of loss.  Better yet, you should have an emergency fund for at least that much set aside.

According to the Insurance Information Institute, about one in every 15 insured homes has a claim each year, so you will want to carefully consider those odds.

Lately, some insurance carriers are renewing their clients’ policies with higher deductibles on the sly. They are slipping the news into the fine print when the bill comes in the mail, where you may not even notice it.  Why?  Good question.  This may help to keep their own risk lower, or maybe it helps their agents avoid having to inform clients that their premiums are going up—higher deductible, lower premium after all—lower deductible, higher premium.  It’s the same idea as the trip to the grocery store where in order to keep the cost of a box of crackers the same, the box keeps getting noticeably smaller, as if you hadn’t noticed.  But with your policy, you MAY NOT notice your coverage got smaller by increasing your deductible until you have a claim and are met with a double whammy of finding out you have to pay more out of pocket than you had planned.  You certainly don’t want to let that happen.

Or, are you one of many homeowners who has their insurance premiums paid through the escrow in their mortgage payment?   If so, you may be unaware of any changes in your policy affecting your deductible, since you may not be seeing the bill.

You may be interested to know that when a claim is filed, it is fairly common for the insurance company to send you a check for non-repairable personal belongings reduced by the amount of your deductible (assuming there ARE some and that they exceed the deductible amount).  This allows you to absorb the cost in that manner.  However, you cannot count on such a scenario.

Another fact to consider is that the average claim size according to the Insurance Information Institute was $8,668 for the 5 years between 2009 and 2013.  If your deductible is more than you can manage, or a large percentage of the full claim amount, you may find yourself up the proverbial creek without a paddle, meaning your damage is likely to go partially un-repaired.

So now that you have a better understanding of deductibles, you will want to review your policy and your budget to make sure that you won’t be caught unprepared.  And if your agent tells you that you don’t have to pay your deductible until the work is done, I’d suggest getting a new agent, because he or she is clearly uninformed how the claims process works.  Realize that the agent is a specialist in selling insurance, not necessarily in claims.

So be informed, and be prepared.

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