Increasing homeowner’s insurance deductible results in annual savings

Posted by Tom Kalinski Founder RE/MAX of Boulder on Sunday, April 14th, 2013 at 6:05pm.

Whether saving more money or freeing up cash is the goal, homeowners can consider cutting down their insurance bill by increasing their deductible.

According to Forbes, increasing the insurance deductible – and not just by a few hundred dollars – can do just that.

Depending on the value of the home, savings and income, setting a $2,500 or even a $5,000 to $10,000 deductible can save a homeowner $1,000 a year – and more for owners of higher-valued homes.

When homeowners choose a deductible, they’re picking a number they’re willing and able to spend out of pocket in the case of a loss. It should certainly cover what they would prefer to write a check for versus calling the insurance company.

“We have clients with deductibles of $100,000 fairly routinely on $5 million homes,” Mary Boyd, senior vice president and chief operating officer for ACE Private Risk Services, tells Forbes.

And some ACE clients with multiple homes and a “significant” net worth have deductibles in the millions of dollars, she says.

Choosing a low deductible is “a characteristic mistake,” Jack M. Guttentag, a professor emeritus at the Wharton School of the University of Pennsylvania who runs MortgageProfessor.com, tells Forbes.

“What you want is coverage for the risks that you can’t pay for yourself,” such as a pine tree that bisects the living room or a major electrical fire that takes out a gourmet kitchen, he says.

Homeowners should pick the number they’re willing to spend out of pocket based on their resources – how much income they have coming in and how much money they have in the bank, Forbes reports.

On a house insured for $1 million with a $2,500 deductible, a homeowner could save $1,000 a year by going to a $10,000 deductible at ACE (the premium and savings will vary depending on the house's location and other factors). Since the homes ACE insures typically suffer a loss about once every 20 years, this is a very good bet, says Boyd.

Ted Mitchell, a senior public relations specialist with MetLife Auto & Home, says his company has observed a trend toward higher deductibles in recent years. While a typical homeowner's insurance policy deductible is $500 or $1,000, MetLife offers flat dollar deductibles of up to $10,000.

But homeowners don’t have to go to the max for the savings to kick in. In one example, on a coastal Virginia house insured by MetLife for $1 million with a $1,000 deductible, a homeowner could save $300 a year by going to a $2,500 deductible or $600 a year by going to a $5,000 deductible, he says.

To help minimize the risk and severity of a loss and the out-of-pocket tab for a high deductible, Boyd says homeowners should install more high-tech safety measures such as automatic leak detectors, battery backup systems for sump pumps and lightning protection systems as well as the usual burglar and fire alarms. Homeowners get additional credits on their premium for these efforts.

However, homeowners should consider insuring items such as high-end jewelry under a valuables policy, as if their deductible is $10,000 and their jewelry is lost, stolen or destroyed, they – not the insurance company – will foot the bill. Under a valuables policy, no deductible applies in the event of a loss, according to Forbes.

Tom Kalinski 
Owner and Founder
RE/MAX of Boulder
303-441-5620
tomkalinski33@gmail.com

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