Is Your Deductible Too High?

weather-damageIn my agency we are extremely thorough when discussing coverages and deductibles. I have many discussions with my clients about deductibles for auto and home insurance and especially about the economic impact of higher deductibles. I believe that any time you can assume more risk on either your home or auto insurance, it is a good thing. Not only does it make you more conscious of your behavior, it can help lower your auto and home premiums. So, when is the best time to use higher deductibles? Believe me, insurance companies want you to choose higher deductibles, but many times they don’t reward you significantly for using them. I think the increased risk of higher deductibles should be properly rewarded.

When is it economically advantageous to have higher deductibles on your homeowners insurance? Many people only think of homeowners claims as incidents that involve negligence on their part. I always hear, “nothing is going to happen at my house. We are very careful.” This may be the case, but claims generally stem from the unexpected events we suffer, and many times do not involve the actions of the homeowner. I could write a book on strange homeowner’s claims, but that is for another time. What many people fail to consider are the acts of God claims either through direct acts or through some of the special animals in his Kingdom! I see so many clients choose a high deductible on their homeowners insurance policy, and then they are not happy when a hail storm hits. They want the new roof, but don’t want to pay a huge amount for it. If lightning knocks out all of your electronics, and their value is less than your home insurance deductible, you pay out of pocket for the replacement of the new gadgets. Do you maintain that amount in your budget? Insurance companies know there is not a significant difference in the frequency of home insurance claims when deductibles are higher. Therefore, the premiums are not significantly different or less expensive. After a 2011 hail storm in Knoxville, TN, many companies mandated a higher minimum deductible for home insurance. One company went from an optional deductible of $250 to a minimum of $1500. This company made up their loss gap quickly. This minimum required home insurance deductible was not to save premium dollars for you but to save money for the insurance company.

Let’s look at an example of an actual insurance policy and see if the savings makes sense.

 

Dwelling coverage $175,000 
Home insurance deductible $ 1000Annual Premium $1245
Home insurance deductible $2500Annual Premium $1125
PREMIUM DIFFERENCE $120

You are saving $120 per year to assume $1500 more of the risk. You would have to go 14.5 years claim free to break even. Does that make financial sense for you? What are the weather patterns in your area? Do you have $2500 in the bank to properly repair your home in the case of damage? Many clients think the higher deductible is better, but they don’t prepare for an actual claim. I know in the Knoxville area, hail and wind claims are not a rarity, so I always advise my clients to choose a lower deductible. With the average amount of debt increasing nationally, do you have enough credit to make repairs in case of a claim? If the repairs are not completed, your insurance company may non-renew your insurance policy which means you must obtain new insurance.

The Harsh Reality

Recently we acquired a new client after he had a claim with another home insurance company. His deductible for wind and hail was a percentage deductible which means you pay a percentage of your dwelling coverage as your deductible. He did not realize this because it was not explained to him. Yes, he signed the application, but he did not read it and understand it. He thought his deductible was $1000, but it was $3000. He did not have enough money to repair his home and had to acquire a home equity loan to repair his roof. I am certain he would have paid $20 more a month, so he wouldn’t need to take out a loan to pay for damages.

Now, what if you have money in the bank and can pay a higher deductible? Is that still the best use of your money when an “act of God” causes a claim, and it is not your fault? I see so many of you choose higher deductibles and then regret it at claim time. Make sure you consider all the consequences of the claim and weather. I have a great friend who chose a $5000 deductible on her beautiful home. I tried to change her mind but could not. When the wind took down 5 trees and destroyed her dock, she regretted the $5000 deductible. It will take her 30 years claim free to make her money back from the tree claim with the high deductible.

Higher Deductibles for Auto Insurance

Now, let’s discuss auto. Prior to 2011, I always recommended a $100 comprehensive auto deductible. Comprehensive coverage for auto insurance claims includes hail, vandalism, theft, and any act of God. It is my belief that you shouldn’t have to pay for damage that is not your fault. Of course, you might think you’re fine with it until something bad happens (car vandalized or stolen) and a claim occurs. I see this scenario so many times. Usually the difference between $100 and $500 comprehensive deductible yearly is negligible.

Unfortunately, after the storm in 2011, many insurance companies again mandated a higher comprehensive auto insurance deductible. Many auto insurance companies will not write a comprehensive deductible lower than $250 now. $250 is still much better at claim time than $500 especially if you have more cars involved. Many times I hear, “We have our cars in the garage.” What if you are traveling and a hail storm occurs? Again, you just don’t know. After the hail storm in 2011, I had insurance companies tell me not to write $100 comprehensive deductibles any more. In that storm my five companies paid over $6 million in comprehensive auto claims. If I had written $250 deductibles, the companies would have paid less than half of that. See why they want to write higher comprehensive auto deductibles? If you have comprehensive auto deductibles higher than $250, this is for the insurance company and agency benefit, not yours.

A great question to ask your agent is, “what coverages do you personally have? May I see them?” I have my declaration pages available, so clients can see that I offer the same coverage for them that I have for myself? Isn’t that the way you would want it? Why would I offer one coverage for you and another for myself?

When you are considering deductibles for your auto and home insurance, make certain you consider what happens should a claim occur and how much it will cost you out of pocket.