Raising a deductible is an easy way to lower an insurance premium, moving some of the risk from the insurer to the policy holder. Raising a homeowner's insurance deductible from $500 to $2,000 lowers the average annual premium by 16 percent nationally, with savings ranging from 4 to 40 percent, depending on where you live, according to recent report by insuranceQuotes.com.
Increasing a $500 homeowner's insurance deductible to $3,000 lowers the national average premium by almost 20 percent, and raising it to $5,000 lowers it almost 28 percent.
That's a significant amount of savings, but switching from a $500 deductible to a $5,000 one can be risky for consumers who don't have that much money in savings, says Laura Adams, senior analyst at insuranceQuotes.com.
"By raising your deductible, it's kind of a forced way to make sure you don't make claims that are small," Adams says.
A worthwhile change in some states
Insurance rates are regulated by states, and some states allow lower rates with higher deductibles. North Carolina is the best state to raise a homeowner's insurance deductible, with a 40 percent savings when raised from $500 to $2,000 or $3,000, and a 44 percent savings with a $5,000 deductible.
Other states with more strict insurance laws, such as Indiana and Texas, only offered 6 percent in savings when increasing a deductible to $2,000 - showing that it may not be worth the extra financial risk for homeowners in those states. Hawaii had the lowest savings for a $2,000 deductible: 4 percent.
The average annual premium was $1,034 in 2012, according to the latest data from the National Association of Insurance Commissioners.
The most common deductible is $500, Adams says. Increasing it to $2,000 has the most effect in these states by percentage of a drop in premium:
- North Carolina: 40.55 percent.
- Rhode Island: 25.62 percent.
- Florida: 23.23 percent.
- Connecticut: 21.76 percent.
- Pennsylvania: 20.58 percent.
- Massachusetts: 20.20 percent.
- California: 18.79 percent.
- Michigan: 18.51 percent.
- New Hampshire: 18.29 percent.
- Georgia: 17.70 percent.
Different deductibles in disaster-prone areas
Homeowner insurance rates vary by carrier and location, including typically higher and separate rates in disaster areas. Hurricane insurance in Florida and other Gulf Coast states is an additional cost to a regular homeowner's insurance policy, coming with its own deductible, says Chris Hackett, director of personal lines policy at the Property Casualty Insurers Association of America.
But raising a hurricane deductible, for instance, may be difficult.
Disaster deductibles are based on a percentage of the insured value of the property, ranging from 1 to 5 percent of the insured value. A home valued at $100,000 with a 5 percent hurricane deductible would equate to a $5,000 deductible if a hurricane hit.
A homeowner can try to negotiate how much the hurricane deductible is, Hackett says, but their options may be limited if they live in a high-risk area. The hurricane deductible is separate from the homeowner's regular insurance policy - for fire, theft and other non-hurricane damage - though the homeowner should be able to increase the deductible for their regular policy.
"Wind peril is one of the greatest risks" in those coastal regions, and is why a set amount of hurricane insurance is required to help insurers manage their risk, Hackett says.
"Insurance is really designed to cover you for those large losses, and not intended to be a maintenance policy," he says.
What lenders want
A home lender is most concerned with the type of insurance coverage and the replacement value than the amount of deductibles, says Ellen Davis, president of Life Health Home Insurance Group. Davis, who doesn't sell homeowner's insurance but works with mortgage lenders, says most lenders require insurance to cover replacement value or at least the assessed value of the home.
A mortgage will still have to be paid if a home is burned to the ground, she says, and insurance should pay to rebuild.
The homeowner's insurance deductible should be reasonable for the homeowner, Davis says. A $5,000 deductible for someone who put 3 percent down on an FHA loan may be questioned by a lender, she says. First-time homebuyers who are on a tight budget, she says, may only want to have a $500 deductible.
What if you can't pay?
Jumping from a $500 insurance deductible to a $5,000 one can result in big savings - from 13 percent in Hawaii to 44 percent in North Carolina - but being unable to pay that $5,000 can lead to an insurer dropping the policyholder, Adams says.
Your insurer will deduct $5,000 from the check it gives you to make repairs, and if you can't afford to pay that $5,000 from your own pocket to help make repairs, you could be dropped by your insurer if the repairs aren't made, she says.
Or if they don't drop you, you could face higher premiums, Davis says. Not all insurers raise rates after one claim is made, she says. Instead of dropping a customer, the insurance company could increase the premium for the next five years until the homeowner shows five years of no claims, Davis says.