There are lots of decisions to make when buying home insurance. What’s the value of the items in your home? Do you have any special items or valuables that need to be named on the policy? What’s the rebuilding cost of your home? Do you need additional coverage for sewer backup or roof collapse?
And then there’s the question of the deductible. If you’ve been comparing home insurance quotes online, you might have noticed that changing your deductible affects how much you pay for home insurance. But what is a home insurance deductible, and how does it work?
What is home insurance?
Let’s start with the basics. Home insurance protects the most significant investment you’ll make in your life – your home – in case of a disaster. If there is a burglary, home insurance will pay to replace stolen items. If someone sues you over something that happened on your property, home insurance will pay for your defence and settlement. And if there’s a fire, home insurance will pay to repair or rebuild your home.
What is a home insurance deductible?
When something happens that your home insurance covers, the deductible is an amount you pay for yourself before your insurance coverage kicks in. For example, if you have a $1,000 deductible and are replacing $20,000 worth of items are stolen from your home, you pay the first $1,000, and insurance would cover the other $19,000.
Your deductible applies to any claim on your home insurance policy. If there was a fire, and your deductible was $1,000, your insurance company would pay for the cost of rebuilding, minus $1,000.
How does the deductible affect my home insurance premium?
When you own a home, you’re at risk for disasters that could potentially leave you homeless and bankrupt. It can cost tens of thousands of dollars to replace your valuables after a burglary. And it can easily cost a million dollars to clean up the mess and rebuild a home after a fire.
Homeowners also take on a fair amount of risk for smaller events that are expensive but not life changing. If a dangerous storm damages your roof, it might cost you a few thousand dollars to repair it. If a tree falls on a fence, the cost of cleanup and repair might cost about the same.
Home insurance could pay for these expenses. But events like these which are expensive but not life-changing, happen frequently.
Enter: the insurance deductible. A zero-dollar home insurance deductible means you won’t think twice about calling your insurance company to pay for a (relatively) minor nuisance. But suppose your home insurance deductible is $10,000. In that case, it’s not worth it to call them for smaller expenses because you are going to be paying the first $10,000 yourself anyway.
Knowing they don’t have to worry about small claims for common mishaps, your insurance company can lower their price by choosing a higher deductible.
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What deductible should I choose?
When shopping for home insurance, choosing a higher deductible will lower your overall premium. A lower deductible can help you to claim more minor expenses but results in a higher premium.
For most homeowners, it’s wise to choose the highest deductible the insurance company will allow.
Over time, it costs more money to keep your deductible low and have home insurance pay for smaller expenses. Think of it this way: if you save $100 a month in a high-interest savings account, it will take you less than two years to save $2,000 for emergencies requiring a deductible of that amount. However, if you spend that money on an insurance policy instead, that money is gone.
What’s more, every time you make a claim, your home insurance rates can go up – even if you switch to a different insurer. So it’s best to avoid making home insurance claims for smaller costs anyway.
If there is a major disaster like a fire, a large deductible might be a tough pill to swallow. However, it’s still a small amount compared to the overall cost your insurance company picks up. And the chances of a fire happening, while not zero, are small. Statistics Canada says there are around 12,000 residential fires, most of which are relatively minor, each year in Canada, and more than 14 million private dwellings.
It’s well worth choosing the higher deductible when your probability of needing to make a claim and pay the deductible is less than 1 in 1,000. Be sure to have the money set aside or available in a home equity line of credit.
The bottom line
Your home is likely the largest investment you’ll ever make, and home insurance protects that investment in the event of a disaster. When hundreds of thousands of dollars are on the line, damage from a fire or significant storm is likely to bankrupt most Canadian homeowners.
With insurance, you’re far less likely to be financially ruined should disaster strike. And because the probability of losing your home in a fire is so overwhelmingly low, it’s worth it to choose a higher deductible.
In fact, next to comparing home insurance quotes to make sure you’re getting the best deal for the coverage you need, choosing a higher deductible is the best way to save money on home insurance.