I get it. No one likes to pay deductibles.
Heck, I’m an insurance agent, and even I don’t like to pay deductibles.
But deductibles are part of the way insurance works. They have been around for ages, and they’re not going anywhere anytime soon.
So the best thing you can do is to educate yourself on them and figure out how they can be structured to get the best value for your insurance dollar.
If you’ve read my article on the basics of insurance, you know insurance is nothing more than a transfer of risk.
You’re practically paying the insurance company to carry a very large proportion of the risk, and in return, they ask if you would like to keep any of the first portion of that risk.
This is what we recognize as deductibles. It’s the first portion of a claim to which you’ve agreed to hang on.
You have a choice to how much you want to hang on to; Hang on to more in the form of higher deductibles, and it helps to keep your premiums lower, or transfer more of the risk to the insurance company, and in return, they will ask for high premiums.
Deductibles are a pay me now, or pay me later game. You have to choose what’s right for you.
In homeowners policies deductibles can work in a variety of ways. First off, in Texas you should know there are three different deductibles on your policy.
Wind and Hail Deductible
The first one is known as “Wind and Hail”.
This deductible is triggered if there is a loss on your home due to damage by thunderstorms (including tornadoes).
Typically this deductible is a percentage of your dwelling amount.
For example, if your home is insured for $300,000 Replacement Cost Value, and your deductible is one percent, you will be responsible for the first $3,000 of a claim.
It’s important to note that the number one cause of claims in North Texas is from damage by thunderstorms.
Just this last spring, we had some terrible storms for about four months straight. The total amount paid out by insurance companies is somewhere in the neighborhood of $1.5 billion and counting.
Needless to say, every insurance company in this market is going to lose money this year on their homeowners insurance policies.
I bring this up because you might have run into a situation where you wanted a lower deductible say $1,000 or $500 and you probably heard, “we don’t offer that on wind and hail claims.”
That’s very typical.
Most insurance companies today have a minimum one percent deductible on wind and hail, and to get it, you have to insure your home and your autos with the same company.
The bottom line is insurance companies are barely able to stay afloat with one percent deductibles, so that’s why they limit how low the deductibles reach.
I’ve never claimed to be a prophet, but it wouldn’t surprise me to see those minimum numbers climb across the insurance industry to one and a half to two percent in the next few years.
Want lower insurance premiums, no problem.
Simply move your wind and hail deductible to three or five percent and watch the savings roll in!
Now just remember, using the same house insured at $300,000, your deductible would run $9,000 at three percent and $15,000 at five percent.
That would be the “first” portion of the risk you’re keeping, and your insurance company would cover everything OVER that amount.
The second deductible is for tropical storms.
Yes, this means hurricanes.
Now you might be thinking, “We’ve never had a hurricane in North Texas.” And you’re right, we haven’t.
But we’re still close enough that one is “possible,” so the second deductible you’ll see is to cover you just in case a hurricane had enough energy that it made it all the way to North Texas.
The good news is this possibility is so minuscule you can carry a one percent deductible, and it costs you next to nothing.
Sorry Houston and the gulf counties, you all have to get a totally separate policy through Texas Wind Storm Association just to cover your exposure to wind related claims.
All Other Covered Perils
The final deductible is known as “All Other Covered Perils”.
This deductible, as well, is usually set as a percentage like one percent of dwelling, but a lot of insurance companies will let you drop it down to $1000 even $500 if you’re willing to pay for the additional premium.
This deductible will be triggered for a claim that doesn’t fall into the first two categories; losses such as fire or theft are the two biggest ones that are claimed under this clause.
One thing to ask your agent and/or insurance company about your homeowners policy is if it’s an “All Risk” policy or if it is a “Named Peril” policy.
This is an important distinction because an all risk policy will cover anything that’s NOT specifically excluded while a named peril policy will ONLY cover what’s specifically listed on the policy.
Obviously, named peril policies cover much less than all risk policies.
Unfortunately, this is another area that insurance “salesmen” don’t purposefully highlight when they’re trying to get prospective customers to look more at price than coverage.