Understanding your insurance deductibles

Deductible defined

A deductible is the amount of money that you are responsible for paying toward an insured loss. When a disaster strikes your home or you have a car accident, the deductible is subtracted, or "deducted," from what your insurance pays toward a claim. Deductibles are how risk is shared between you, the policyholder, and your insurer.

Generally speaking, the larger the deductible, the less you pay in premiums for an insurance policy. A deductible can be either a specific dollar amount or a percentage of the total amount of insurance on a policy. The amount is established by the terms of your coverage and can be found on the declarations (or front) page of standard homeowners, condo owners, renters, and auto insurance policies.

State insurance regulations strictly dictate the way deductibles are incorporated into the policy's language and how deductibles are implemented. These laws can vary from state to state. 

How deductibles work

A specific amount would be subtracted from your claim payment if you have a dollar amount deductible. For example, if your policy states a $500 deductible, and your insurer has determined that you have an insured loss worth $10,000, you would receive a claims check for $9,500.

Percentage deductibles generally only apply to homeowners policies and are calculated based on a percentage of the home’s insured value. Therefore, if your house is insured for $100,000 and your insurance policy has a 2 percent deductible, $2,000 would be deducted from any claim payment. In the event of the $10,000 insurance loss, you would be paid $8,000. For a $25,000 loss, your claim check would be $23,000.

Note that with auto insurance or a homeowners policy, the deductible applies each time you file a claim. There are exceptions to this practice in Florida and Louisiana, where hurricane deductibles are applied once per season rather than for each storm.

Deductibles generally apply to property damage, not to the liability portion of homeowners or auto insurance policies. For example, with a homeowners policy, a deductible would apply to property damaged in a rogue outdoor grill fire; however, there would be no deductible against the policy's liability portion if a burned guest made a medical claim or sued.

Raising your deductible can save money

One way to save money on a homeowners or auto insurance policy is to raise the deductible. Therefore, if you're shopping for insurance, ask about the options for deductibles when comparing policies.

Increasing your auto insurance's dollar deductible from $200 to $500 can reduce optional collision and comprehensive coverage premium costs. Going to a $1,000 deductible may save you even more. Most homeowners and renters insurers offer a minimum $500 or $1,000 deductible, and raising the deductible to more than $1,000 can save on the cost of the policy.

Of course, remember that you'll be responsible for the deductible in the event of loss, so make sure that you're comfortable with the amount. 

Homeowners disaster deductibles

Standard homeowners insurance covers wind and hail damage from storms and hurricanes. Flood and earthquake policies are purchased separately. But each of these disasters has its own deductible rules. If you live in an area with a high risk for one of these natural disasters, understand how much deductible you will need to pay if a catastrophe strikes.

Start here, check your policies and speak to your insurance professional to learn exactly how your deductibles work.

•  Hurricane deductibles. In hurricane-prone states, special deductibles may apply for homeowners insurance claims when the cause of damage is attributable to a hurricane. Whether a hurricane deductible applies to a claim depends on the specific "trigger" selected by the insurance company. These triggers vary by state and insurer and usually apply when the National Weather Service (NWS) officially names a tropical storm, declares a hurricane watch or warning, or defines a hurricane's intensity in terms of wind speed. Hurricane deductibles are generally higher than other homeowners' policy deductibles and usually take the form of a percentage of the policy limits. In some states, policyholders can choose to pay a higher premium in return for a traditional dollar deductible; however, in high-risk coastal areas, insurers may make the percentage deductible mandatory.
• Wind/hail deductibles work in a similar way to hurricane deductibles and are most common in places that typically experience severe windstorms and hail. These include Midwestern states (like Ohio) and around Tornado Alley (including Texas, Oklahoma, Kansas, and Nebraska). Wind/hail deductibles are most commonly paid in percentages, typically from 1 percent to 5 percent.
• Flood insurance offers a range of deductibles. If you have—or are considering buying—flood insurance, make sure you understand your deductible. Flood insurance deductibles vary by state and insurance company and are available in dollar amounts or percentages. Also, you can choose one deductible for your home's structure and another for the contents of your home. Note that your mortgage company may require that your flood insurance deductible under a certain amount to help ensure you will be able to pay it).
• Earthquake insurance has percentage deductibles that range from 2 percent to 20 percent of the replacement value of your home, depending on location. Insurers in states with a higher than average risk of earthquakes (such as Washington, Nevada, and Utah) often set minimum deductibles at around 10 percent. In California, the basic California Earthquake Authority (CEA) policy includes a deductible that is 15 percent of the replacement cost of the main home structure and starting at 10 percent for additional coverages (such as on a garage or other outbuildings).

Next steps: Steps to take in the event of a homeowners claim.