How high is too low?

I had an applicant recently whose story inspired me to do this post. The thought process that you should use to determine your car insurance and homeowners insurance deductibles are very different. Because most people have plenty of experience with choosing car insurance deductibles, they usually apply the same logic to the new experience of choosing a homeowners deductible. The process is different because the rating factors the insurance company uses after a claim is different.

With car insurance, who’s at fault makes a huge difference in what happens to your rate after a claim. In homeowners insurance, it all comes down to how many claims have there been, how often did they happen, and how much did it cost the insurance company to settle them. If you’re at fault in a car accident, it generally does not matter if there was $200 worth of damage or $20,000 worth. Since most car insurance claims are generally small, the difference between a $500 deductible and $1,000 can be a large percentage of the total damage. So the price difference between the two is a strong reason to do one over the other.

But what about homeowners insurance, should the price between two deductibles persuade you to go one way or the other? Yes, but not nearly as much as in auto insurance. Where as in auto insurance you want to avoid at fault accidents, in homeowners insurance you want to avoid claims, period.

For most people $1,000 is as low as you should consider going. If you’re a responsible saver then $2,500 may be the right deductible for you. Consider this claims story from the applicant I referenced earlier:

“I recently had a fire in my bathroom. I mistakenly placed a candle too close to a towel rack and started the bathroom on fire. I was able to contain the damage quickly, and it resulted in $800 damage. I had never filed a claim with my insurance before so I figured why not use it, it’s what I’m paying for. My deductible was $500 so they ended up paying $300. A year later, while on vacation, my house was broken into. Between the theft to my property and the damage to the house, the loss totaled $3,500. Of course I filed the claim and the insurance company paid out $3,000. Six months later, the same thing happened again, this time a $2,500 theft claim. I later learned after talking to a policy officer that this is common with thieves. They rob you, wait a couple months for you to accumulate new stuff and then hit you again.”

This applicant was very happy with the way the insurance company handled the claims and the speed in which they took care of them. So why was she shopping around? Her insurance company was dropping her for having too many losses too quickly. Had she had a $1,000 deductible she wouldn’t be in that situation; the initial bathroom fire claim would have never happened. And let’s face it, when we’re talking about insurance a house for hundreds of thousands of dollars, $800 is small potatoes. Insurance is meant for catastrophic financial loss. Unfortunately, many people do not have much of a savings and $800 can seem like a catastrophic financial event at the time.

What kind of price can you get with 3 claims so quickly? I work with 5 homeowner insurance companies in her state. Most were not willing to accept her at any rate, the best I could do, $2,400/year. Nothing fancy about the house either, $145,000 house with standard coverage.

If you want to talk about deductibles, or any insurance topic, please contact me.  Do you have a claims story that you regret?  Leave a comment.