Paying the annual premium on one's homeowners' insurance policy can inspire sticker shock, particularly when you're first buying the home and possibly depleting your cash reserves.
One way to bring that premium dollar amount down is to raise the deductible; that is, the amount that you would owe out of pocket on a property damage claim before your insurance coverage kicks in.
A high deductible offers the advantage that you won't be tempted to run to your insurance companies for minor damage, which could lead to it raising your premiums in the future.
Yet a low deductible offers the advantage of reducing the financial hit that you'll take if disaster strikes. And if your finances get seriously tight, having a too-high deductible can imperil your very ability to bring your home back to livability.
So, how high can or should you go when choosing your deductible amount?
If you are taking out a loan to buy your home, your lender will have something to say about the deductible amount. That's because your home will also be its collateral for the loan.
If you choose a deductible that's so high that you end up unable to make your own repairs, and the house remains in bad shape while you default on your mortgage, the lender might end up in the position of foreclosing on a home that it can't sell for enough to cover the loan amount.
The terms of the loan you're applying for probably specify a maximum deductible amount, along with containing a requirement that you buy homeowner's insurance in the first place.
Limits on the amount of your deductible will be placed by your insurer, as well. The standard deductible on a homeowners' policy is $500 to $1,000. Taking that up to $1,500 or $2,000 can make a difference in your premium, and will not likely raise any eyebrows with your insurer.
But, depending on the total value of your home and your financial resources, you could be able to raise that amount farther, even into the tens of thousands of dollars. Ask your insurance rep for the details.
Also keep in mind that you might have portions of coverage with separate deductibles, such as for wind/hail and hurricanes. Or you might even have separate policies with their own deductibles, such as for earthquakes and floods.
If you can't confidently say that you'll be able to set aside the full amount of your homeowners' insurance deductible(s) and leave that money untouched during the time you own the home, then that deductible amount is too high.
Some people open a separate bank account just for emergency backup reserves like this. A home is too large an investment to gamble on, so be realistic when choosing your deductible amount.
