How do homeowners insurance deductibles work?

When you buy a house, your mortgage lender will require you to purchase homeowners insurance to ensure their interest in the property is protected in the case of a disaster. Insurance also protects your interest, helping you replace or repair parts of your home after a covered event.

The cost of homeowners insurance depends on a number of factors. One thing that informs your monthly premium is the amount of your deductible – something you can choose. However, many buyers wonder: When do you pay the deductible for homeowners insurance? Understanding exactly when and how you pay your home insurance deductible is key to managing your finances when filing a claim.

What is a homeowners insurance deductible?

A homeowners insurance deductible is the amount of money a homeowner must pay out of pocket before home insurance coverage kicks in.

You won’t pay your deductible to the insurance company like a monthly bill. Instead, it’s subtracted from the total amount the insurance company pays out for your claim. You then pay the rest of the money (your deductible) directly to the contractor or company hired to fix the damage.

For example, if a fallen tree causes $5,000 worth of damage to your roof and you have a $1,000 deductible, your insurance company will issue a check for $4,000. You will be responsible for paying the remaining $1,000 out of pocket to the roofing company to complete the repairs.

To make sure you have the right protection for every situation, it’s also helpful to understand the differences between homeowners insurance vs. a home warranty.

You pay on a per-claim basis

It’s important to note that homeowners insurance deductibles are not like health insurance deductibles. When it comes to homeowners insurance deductibles, you’re responsible for paying a deductible on a per-claim basis, not a per-year basis. This means if your home suffers more than one damaging event, you’re responsible for paying the deductible on each of those claims.

There’s one exception to this rule. In Florida, there is only one deductible you must pay for hurricane damage per hurricane season, instead of per claim or per storm.

Examples of paying a home insurance deductible

Now let’s take a look at two possible scenarios when filing an insurance claim: one in which your deductible is lower than the cost of damage to your home, and one in which your deductible is higher.

Your deductible is always accounted for before the insurer pays its part. Here’s how that looks in practice:

• If your deductible is less than the claim: If your deductible is $500 and you file an insurance claim for $5,000 worth of damage to the siding of your home, your insurance company will pay you $4,500. At the end of the process, you will pay your $500 deductible directly to the siding company repairing the damage.
• If your deductible is more than the claim: If the cost of damage to your home is $350 and your deductible is $500, the insurance company wouldn’t pay anything. In that case, you wouldn’t go through the work of filing an insurance claim. Instead, you would just avoid the claim entirely and pay the $350 out of pocket to cover the repairs.

Types of homeowners insurance deductibles

On your homeowners insurance policy, you’ll find two types of deductibles: standard and percentage. Let’s take a closer look at both.

Standard deductible

The standard deductible is a fixed dollar amount, typically in the range of $500 – $2,000. When you have a standard deduction, the amount you’ll pay stays the same, no matter the cost of damage. This is what you’ll pay for most of your insurance claims.

Percentage deductible

Percentage deductibles are usually reserved for wind-, hail-, and hurricane-related claims. They’re a percentage of your home’s insured value. These deductibles are typically 1% – 10% of that value. So, if your home is insured for $300,000 and your deductible is 1%, you would pay $3,000 out of pocket. If you made a claim for $10,000, your insurance would cover $7,000.

What is a disaster deductible?

While wind, hail, and hurricane damage are covered under your standard insurance policy, insurance for certain natural disasters must be purchased separately. These disasters have different deductible rules and your coverage or requirements to have them may depend on where you live.

Let’s take a look at a few common disasters that aren’t covered by standard insurance policies.

Earth movement

Most standard insurance policies don’t cover earth movement, which includes earthquakes, mudslides, and sinkholes. When it comes to sinkholes, one exception may be if you live in Florida, where insurers are legally required to offer some sort of protection from ground cover collapse. However, that may not always cover sinkholes, so it’s best to get more information from your insurer.

When it comes to these deductibles, they’re usually percentages of the insured value of the home. If you live in areas that are more prone to earthquakes, the minimum percentage deductible may be higher. For example, the minimum deductible for most California homes is around 15%.

Flooding

Another disaster that is not typically covered by most insurers is flooding. And though it isn’t covered on a standard insurance policy, it’s a requirement for those who live in high-risk flood areas to have this type of insurance. If you aren’t required to have flood insurance, you may still want to consider getting it.

When it comes to purchasing flood insurance, there are two types: National Flood Insurance Program (NFIP) and private flood insurance. Most plans offer two types of deductibles: one for damage to the building itself and one for damage to the contents inside the building. These deductibles can be anywhere from a minimum of $1,000 to a maximum of $10,000 each.

How to choose the right deductible

Choosing a deductible is a matter of weighing the short-term cost of a deductible against the long-term cost of a policy. It also means taking a look at your finances to determine what you can afford should you need to pay your deductible unexpectedly.

Understand how your deductible affects your premium

When you have homeowners insurance, you’ll need to pay a premium. An insurance premium is a monthly or annual payment you make to keep yourself insured. Depending on the way your loan is set up, your homeowners insurance may be collected in your monthly mortgage payment, held in an escrow account, and then paid by your lender. If you’re not required to have an escrow account, you’ll pay your homeowners insurance directly to your insurer.

There are several factors that go into calculating your premium, and a major one is risk. The higher the risk to your insurer, the higher your premium may be. Part of assessing that risk is determining how likely you are to make a claim based on:

• How your home is built
• The age of your home
• The insurance claims history in your area

Another massive part of assessing risk is determining how much it’s going to cost the insurer to pay your claims. This is where your choice of deductible directly impacts your ongoing costs:

• When your deductible is higher, your premium tends to be lower: The more money you agree to pay out of pocket, the less your insurer has to pay. By taking on more of the financial risk yourself, the insurance company rewards you with lower monthly or annual payments.
• If you have a low deductible, your insurer may offset risk with a higher premium: When you choose a low deductible, the insurance company will have to pay out more money if you file a claim. To offset this increased financial risk, they will charge you a higher premium.

While choosing a higher deductible can save you money monthly or yearly, a high deductible can leave you in financial distress should you suffer damage or loss and you don’t have an emergency fund to cover the cost. Whatever deductible you choose, make sure you have at least that amount saved in cash should you need to use it.

Keep in mind, your premium may go up after you file a claim or two, regardless of the deductible you choose.

FAQ

Still wondering about some aspects of home insurance deductibles? Let’s look at the answers to some frequently asked questions.

When do I pay the deductible for homeowners insurance?

You’ll pay the deductible for your homeowners insurance policy once you file a claim and receive a settlement amount, minus your deductible, from your provider. Remember, if your settlement amount is lower than your deductible, there won’t be a need to file a claim. You’ll just pay out of pocket instead.

What is the average homeowners insurance deductible?

The options available for homeowners insurance deductible amounts will vary depending on the company. Most home insurance deductibles, however, are $100 – $5,000, while the average cost is $1,000.

Should I choose a low or high deductible for homeowners insurance?

When you’re deciding between having a low or high deductible on your homeowners insurance policy, it’s important to take a look at your current financial situation and your long-term goals. If you’re able to afford a high deductible in case of emergency, it might be best to go that route since a higher deductible usually means lower insurance premiums.

The bottom line: Understand your homeowners insurance deductible

Understanding how your homeowners insurance deductible works is essential for balancing your monthly budget with emergency preparedness. Choosing a higher deductible can safely lower your insurance premium, provided you have enough money set aside in an emergency fund to cover out-of-pocket costs after a disaster. Ultimately, the right deductible structure protects both your home and your peace of mind without creating unexpected financial distress when you need to file a claim.

Ready to secure your dream home with the right financing? Apply online with Rocket Mortgage today to get started.