“This policy contains a clause which may limit the amount payable.” You’ve probably seen this sentence on the front page of most home insurance policies, but have you wondered what it actually means?
This sentence is a reminder that your policy contains a deductible, which is the amount of any covered loss that you are personally responsible to pay before your insurance picks up the rest. Most claims will be subject to a deductible; the size of the deductible will vary depending upon your insurance provider’s policy, and the decisions that you made when you purchased your coverage.
How deductibles work
Every insurance policy contains a standard deductible, which will apply to all claims that you make. When purchasing a policy, you have an opportunity to choose from several options; these generally range from $500 to $5,000.
For example: if your policy has a $1,000 standard deductible, and you suffer $50,000 of damage in a kitchen fire, you will be responsible to pay the first $1,000 – and then your insurance provider will step in to cover the remaining $49,000.
The different types of deductibles
Depending on the insurance provider that you choose, your policy may also contain several additional deductibles which apply to specific causes of loss. These deductibles apply in order to manage claims costs in territories that are high-risk than average, which allows insurance providers to keep their premiums competitive.
The most common additional deductibles include:
Applies to claims resulting from vandalism, mysterious disappearance, burglary and theft. This deductible often applies to rental and vacation properties, which are more vulnerable to crime because of the periods when you aren’t around to protect them. It may also apply if you share your home with unrelated persons or participate in home sharing programs, because both circumstances increase the likelihood of crime damage. This deductible usually ranges from $2,500 to $10,000.
Applies to claims resulting from loss or damage caused directly by an earthquake. Most insurance providers will provide you with several options to choose from when purchasing earthquake coverage. Since an earthquake would cause catastrophic losses across an entire region, deductible options are usually based on a percentage of the total limit of property coverage under your home insurance policy.
Glass breakage deductible
Applies to claims relating to glass that forms part of your home. If desired, you can sometimes eliminate this deductible for a small additional premium.
Water backup deductible
Applies to claims resulting from water or sewage backing up into your home from a municipal sewer system or a private septic system. This deductible usually applies in areas with a higher than normal risk of sewer backup losses, such as homes in floodplains, or homes in older parts of town where the sewer infrastructure has difficulty accommodating modern volumes. You can usually choose from several deductible options, ranging from $2,500 to $25,000.
Water damage deductible
Applies to claims resulting from the sudden and accidental release of water. This deductible also often applies to rental and vacation properties, which are more vulnerable to serious water damage because of the periods when you aren’t around to notice and stop a water leak. This deductible generally ranges from $2,500 to $5,000.
Wind and hail deductible
Applies to claims resulting from wind and hail storms. This deductible usually may apply in areas with a higher than normal risk of wind and hail storms. The deductible usually ranges from $2,500 to $5,000.
Higher versus lower deductibles
When deciding upon your policy deductibles, you will notice that higher deductibles usually reduce your policy’s annual premium. This is because higher deductibles reduce the likelihood of frequent, small claims. When you choose a higher deductible, you’re showing your insurance provider that you don’t intend to use your policy for small, unnecessary things – in return, your insurance provider can offer you a lower premium, because you are unlikely to create a disproportionately high share of claim costs.
Avoiding frequent small claims is also helpful to you in the long term: making a claim usually eliminates any claims-free discounts that you currently enjoy on your policy, which increases your annual cost of insurance. Frequent claims can also result in future surcharges, or even the loss of your coverage, reducing or even eliminating any benefit received from making small claims. From a financial perspective, it makes more sense to manage your insurance premium by taking advantage of reasonably higher deductibles and by avoiding unnecessary small claims.
Insurance is designed to take care of large losses which can cause significant financial damage to your family. Smart deductible choices can help to keep your insurance premiums as competitive as possible, while preserving your coverage for those critical incidents when you really need it.
For more information on deductibles, or to get a quote and explore a wide range of deductibles, contact Square One at 1.855.331.6933.