Homeowners insurance deductibles explained

Flat and percentage deductibles

The Texas Department of Insurance explains that a deductible may be a specific dollar amount or a percentage, and that you should translate any percentage into dollars before you buy.

Flat deductibles are a set amount, such as $1,000 or $2,500.

Percentage deductibles are a share of your dwelling coverage limit, not of the claim. TDI's example: two homes are each insured for $150,000, and hail destroys the roof with $6,500 in repairs. The policy with a $500 deductible pays $6,000. The policy with a 5% deductible, which is $7,500, pays nothing, because the repair costs less than the deductible.

Separate deductibles for certain perils

Some policies carry one deductible for most losses and a different one, often a percentage, for specific perils such as windstorm, hail or hurricane, depending on where you live. Read every deductible on the declarations page; TDI notes that the first page of your policy summarizes your coverages, limits and deductibles. A quote with a low "all other perils" deductible can still have a large wind or hail deductible.

Flood is not covered by a standard homeowner's policy and has its own policy and deductibles.

The deductible applies per claim

TDI points out that home insurance deductibles work differently from health plans. Instead of covering a year, the deductible is applied to each claim. Two separate losses in a year means paying the deductible twice.

Lender limits

If you have a mortgage, your lender's rules may limit your choice. Fannie Mae's Selling Guide sets the maximum deductible for required property insurance on one-to-four-unit homes at 5% of the coverage amount, and if the policy has separate deductibles for different perils, each one must not exceed 5%. Other loan programs and lenders have their own limits, so ask before you choose a high deductible.

Weighing premium savings against risk

TDI notes that in general, the higher the deductible, the lower the premium, and that switching from a $500 deductible to a $1,000 deductible can save as much as 20 percent on premiums. The trade-off is that you pay more when you have a claim.

Ask three questions:

1. Could I pay this deductible tomorrow? Keep at least that amount in savings after closing. A first-year homeowner with a thin cushion may be better off with a lower deductible.
2. How much do I save each year? Divide the extra amount you would owe on a claim by the yearly savings. If it would take many claim-free years to come out ahead, the higher deductible may not be worth it.
3. Would I file small claims anyway? TDI notes that filing small claims may affect what you pay for insurance later. Some owners choose a higher deductible and pay small repairs themselves.

Comparing quotes fairly

When comparing quotes, make sure the deductibles match. A cheaper quote with a 2% wind deductible is not comparable to one with a $1,000 deductible for all perils. Our quote comparison guide walks through the other terms to line up.

The bottom line

Deductibles may be flat or a percentage of your dwelling coverage, can differ by peril and apply to each claim. Convert every deductible to dollars, check your lender's maximum, which is 5% of coverage for Fannie Mae loans, and choose an amount you could pay from savings right after a loss.