Saving Money on Insurance - A Reader Asks
Welcome to Saving Money with Andrew!
A reader asks:
Hey Andrew,
Not sure if you are experiencing this as well, but our homeowners insurance premium went way up this year (by over $1,000). Our insurance broker told us there’s an option to take a higher deductible, meaning that if we have an insured loss, we’d have to pay more before the insurance company started reimbursing us. Going from $5,000 to $7,500 will reduce our annual premium by $297, and a $10,000 deductible would reduce it by $600. Do you have any thoughts?
Choosing the right deductible on your homeowners (or renters, auto, or other insurance) policy is tricky, but here are some key principles I find helpful:
Step 1 - Can you afford to increase your deductible?
As I wrote in Saving on Renter’s and Homeowner’s Insurance:
The purpose of insurance is not to protect against every loss. Indeed, most people don’t even file small insurance claims because of the hassle and the likelihood of the claim increasing future premiums. Instead, insurance is meant to cover against losses that would be financially devastating, like the destruction of a portion of your home.
Stated differently, if you own a home and have a sufficient emergency fund (at least three to six months of basic expenses, for example), and can afford to deal with a small to moderate surprise loss, you can start thinking about whether the savings from an increased deductible is worth it.
Step 2 - Quantify the benefits, and the costs
The benefits are simple. Increasing from a $5,000 to a $7,500 deductible will save you about $300/yr, and going to $10,000 will save you about $600/yr.
The costs are a little trickier. Based on some research, the average homeowner files a claim once every 20 years or so, and the average claim is typically a bit under $9,000. That is, if you are an average homeowner, over an average 20 year period, going to a $10,000 deductible might cost you an extra $4,000-5,000 the one time you file a claim, while saving you $12,000 in premiums ($600 * 20).
And the math is actually even better for a few reasons:
Filing a homeowners claim is not free. In most states, filing a claim will increase your future premiums significantly, often by enough such that it is not really worth filing claims of less than $5,000 or so. Insurance companies use data on how often you file claims to determine how expensive you are to insure, and will use that data to determine your premium.
Filing a claim will often make repairs more expensive. Earlier this year, we had significant water and mold damage in our home. We found that local contractors offered us a significantly better rate (a couple thousand dollars less by my estimate) if we paid them directly, rather than going through insurance. The discount was enough that it did not make sense to file a claim.
Step 3 - Decide
In your case, opting for a $10,000 deductible for a $600/yr premium savings seems like a no-brainer, as long as you have enough emergency savings to afford your deductible if you have a loss event. We made the same move earlier this year, increasing our deductible from $500 to $2,500 for a $480/yr savings on our premium.
And now…Andrew’s pick(s) of the week:
The “Bad Art Friend” story took the Internet by storm last week. A great twisting tale of narcissism, accusations, and (allegations of) betrayal.
On a less serious note:
I hope this has been helpful. If you liked it, please share it on social media! Also, please send me your feedback, requests, and success stories.