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Should You Raise Your Homeowners Deductible?
A higher deductible usually results in a lower premium for homeowners and other insurance. That’s because you are assuming more of the risk. In essence, you are self-insuring the lower end of any loss. But just because your premium might be lower doesn’t mean it’s always a good idea to raise your deductible.
The first and most important issue is whether you can afford to pay the losses you might have under a higher deductible. Although most people rarely have a loss under their homeowners insurance, you need to be prepared in case you do. Understand that your deductible represents the amount you will have to pay out of your own pocket, before your insurance kicks in. Don’t choose a deductible that is an amount higher than you would be prepared to pay.
Then look carefully at the relationship between the increased deductible and the decreased premium. At Bensman, we recommend a simple formula. Take the difference in the two deductibles, and divide that by the difference in the two premiums. If the number you get is 5 or less, you should consider raising your deductible. If the number is 3 or less, it’s probably the right move.
For example, say you currently have a $5,000 deductible and you are considering increasing it to $7,500. The move will save you $1,000 a year on your premium. The difference in the deductibles is $2,500; divide that by $1,000, and you get 2.5. In this example, raising your deductible probably is a good idea, as long as you can afford to pay the extra $2,500 if you have to.
Basically, what this calculation shows is the number of years it will take you to break even on your new policy, if you have to pay a higher deductible. In our example, if you have a claim and pay the additional $2,500 in deductible, it will take you 2.5 years to make that back in premium savings. Of course, if you don’t have a claim, you realize the savings every year. And if you have a claim more often than every 2.5 years, it will take you longer to make back your money.
There are other issues that come into play when determining a deductible and coverage limits that are right for you. We are happy to discuss raising your deductible, or any other aspect of your insurance coverage. Just give us a call at 847-572-0800 or email me at email@example.com.