Home insurance deductible vs premium
Fact-checked with HomeInsurance.com
If you’re shopping for homeowners insurance for the very first time, insurance terminology can be confusing. Two of the more common terms to understand are deductibles and premiums. In this article, we’ll look at how a home insurance deductible differs from an insurance premium, and what you should know about each one.
What is a home insurance deductible?
When you file a home insurance claim, the insurance company doesn’t pay for the entire cost of repairs. Your deductible comes into play prior to an insurance payout.
Financial and insurance expert, Laura Adams, explains it this way; “One critical decision you must make when purchasing home insurance is choosing a deductible. Your deductible is the amount you pay when you have an insurance claim.”
Essentially, it’s the out-of-pocket cost that you are responsible for paying after a covered loss before the insurance company will reimburse you for the remaining balance.
In most cases, each time you file a claim, you have to pay your deductible. For home insurance, a deductible is typically only required for dwelling or personal property losses. If you file a liability or loss of use claim, there’s usually no deductible involved.
When you purchase a home insurance policy, you get to choose your deductible (with certain minimums). It should be an amount that you can afford to pay out-of-pocket in the event that you need to file a claim. Most home insurance companies require a minimum deductible of $500 or $1,000, but if you choose a deductible higher than that, it can lower your monthly premium. However, there are other considerations to keep in mind.
In the table below, we’ve outlined some of the advantages and disadvantages of choosing a high deductible.
Having a high deductible
|Choosing a higher deductible can lower your monthly rate.||Higher out-of-pocket cost on top of premiums in the event of a claim.|
|Your rate won’t increase as much after a covered loss.||Higher deductibles don’t always lower your premium significantly.|
|You have the pay the deductible every time you file a claim, regardless of the total claim amount.|
What is a home insurance premium?
A home insurance premium is simply the cost of your insurance. It’s sometimes referred to as an insurance rate. Your premium is calculated as an annual cost — either 6 months or 12 months in length — but you have the option of paying in full or in incremental payments. If you have a mortgage on your home, your premium might also be bundled into your loan payments.
The main purpose of your home insurance premium is to keep your policy active. When you stop paying your premium, the insurance company has the right to cancel your policy within 30 days of the last missed payment. If you accidentally forget to pay your premium, the insurance company will notify you first.
In the U.S., the average home insurance premium is $1,211 per year, or about $100 per month. However, insurance premiums are highly personalized. They are calculated specifically for homeowners based on the state you live in, your age, your credit score, the size of your home, the age of you home and other variables.
There are some benefits to choosing a higher premium (as opposed to a higher deductible), but there are also downsides. Here are the main considerations to keep in mind:
Having a high premium
|You have a lower deductible which means less out-of-pocket in the event of a claim.||Out-of-pocket costs are higher monthly.|
|Higher premiums typically reflect better coverage and higher policy limits.||Filing a claim may increase your already-higher rates.|
Premium versus deductible
A home insurance premium and a home insurance deductible are both forms of out-of-pocket costs. The main differences are when the costs are incurred and how the money is used. Your insurance premium goes directly to your insurance company (typically on a monthly cadence) to keep your policy active. You have to pay your premium in a timely manner, otherwise you risk losing coverage.
Your insurance deductible on the other hand, is only required when you file a claim. The money goes towards the cost of the loss, whether it’s repairing your home or replacing damaged personal items. If you don’t file any claims within a given year, you don’t pay any deductible.
Additionally, your home insurance premium is calculated by the insurance company based on a variety of personal factors. You can’t choose your exact premium, although you can raise your coverage limits, which will increase your rate. With a deductible, you choose the amount based on what you can afford.
How to pick the right premium and deductible
When you’re choosing a premium and deductible, the best piece of advice is to choose an amount that you can afford for payments over time or up front in the event of a claim.
If your premium is too expensive, you might not be able to afford the payments and could lose coverage. If you can’t afford to pay your deductible after a loss, the insurance company might accept a lower amount, but then raise your premium after the fact.
“A good rule of thumb is to make sure your insurance deductibles don’t exceed amounts you typically have available in savings. That strategy will keep you from getting caught in a bad situation if you need to repair covered damages or replace stolen items,” says Adams.
High-income homeowners who can easily afford to pay any amount for their monthly premium will be happier with a high premium and a lower deductible. On the other hand, homeowners who are on a tight budget and may not be able to afford a huge premium on a monthly basis should opt for a higher deductible instead.
Another thing to consider is that homeowners who choose a higher deductible can get a lower premium. According to Adams, “When you can afford it, choosing a higher deductible and taking on more financial risk allows you to pay lower premiums. But the savings vary depending on your location and type of home policy. Compare home quotes for different deductibles and amounts of coverage to make sure you get the right homeowners insurance,” she says.
Why choose a high premium and low deductible
In general, the benefits of choosing a higher premium and a lower deductible boil down to the following:
- Pay less money out-of-pocket in the event of a covered loss.
- Get more coverage and higher policy limits, which means a bigger payout after a claim.
Why choose a low premium and a high deductible
In contrast, the advantages of having a lower premium and a higher deductible are:
- Paying less money on a monthly or annual basis to maintain your coverage.
- Your rate won’t increase as much after filing a claim.
- A home insurance premium is the monthly or annual cost of your policy.
- A home insurance deductible is an out-of-pocket cost you pay towards a loss.
- There are pros and cons to choosing a high premium or a high deductible.
- You should choose a premium and deductible based on what fits your budget for out-of-pocket expenses.
After reading this article, you hopefully have a better understanding of a home insurance premium and deductible. Both are costs that you can’t avoid as a homeowner. However, you do have a certain amount of control over choosing your deductible and premium amount when you buy a policy. Before you settle on a balance, review the pros and cons of choosing a high deductible and a high premium, and make a decision based on what you can afford.