Most people are familiar with insurance deductibles. But there may be a type of deductible you’re not familiar with — a percent deductible. What is it? And is it right for you?
There’s no right or wrong answer when it comes to the question of what kind of deductible is best. The real question is what deductible is best for you and your budget.
The most common type of deductible specifies a fixed amount you’re responsible for paying whenever you suffer an insured loss. A $1,500 deductible means you’re responsible for the first $1,500 of any insured loss, for example. Your insurance covers the rest up to the limits of your policy.
Many homeowner insurance policies now come with a percent deductible, whether you want one or not. Percent deductibles work the same way as fixed deductibles. But the amount of the deductible is a percentage of the replacement cost of your home rather than a fixed amount.
Most of the insurance companies we represent still allow you to have a flat deductible. However, we do offer homeowner insurance with percent deductibles of 1, 2 or 5 percent if that’s right for you.
If the replacement cost of your home is $400,000 and you have a 1 percent deductible, then your deductible for any given loss is $4,000 (1 percent of $400,000). If the replacement cost of your home increases to $500,000, then your deductible automatically adjusts to $5,000.
Why would you consider a percent deductible? They’re a way of minimizing increases in your insurance premiums, as year after year you are always sharing in the same percentage deductible on your policy.
Many insurance companies also offer (and sometimes mandate) separate percent deductibles specifically for wind and hail damage — a major risk in Colorado. So, you could have a fixed deductible for any damage to your home except from wind or hail and a percent deductible for wind or hail damage. When you’re evaluating your home insurance, be sure to look for a separate line for Wind & Hail Deductible. You may think you have a $500 deductible, but at the time of a loss you may find out the $500 deductible didn’t apply to wind and hail and you have a much higher deductible for wind and hail.
Should you pay a higher premium to keep your deductible as low as possible or pay a lower premium with a higher deductible? I recommend speaking with one of our licensed professionals at our Denver, Colorado Insurance Office to walk you through the pros and cons. A higher deductible will mean higher out-of-pocket expenses if you suffer a loss. But high deductibles for your homeowner insurance can pay off big if you file fewer than one claim every five to seven years.