The deductible is one of the most important elements of your insurance policy and the term is the most widely understood by the insurance consumer. It is defined as a specified amount of money that the insured must pay before an insurance company will pay for a claim. Since most consumers carry automobile insurance, they are accustomed to the deductible being the amount that they’ll have to pay out of pocket before the insurance company will step in. Let’s say for example that you’re in a car accident and the damage to your vehicle is $1000, and your deductible is $500. You – the policyholder – will pay $500 of the $1000, and your insurance company will pay for everything over that $500 deductible up to your policy limits.
The homeowners insurance deductible works similarly to auto insurance; however, there are many different types of deductibles available, and sometimes your policy can contain more than one type. Knowing the types of deductibles that your policy contains, what they are based on, and what that means for you after a claim, is extremely important, as this knowledge will allow you to properly prepare for a loss.
COMMON TYPES OF DEDUCTIBLES
- All Other Peril (AOP) Deductible: any peril covered under the policy except those that are listed separately.
- Wind & Hail Deductible: this is the deductible that will apply to any event that results in damage caused by wind and / or hail. This type of deductible is often expressed on your policy as a percentage of the covered dwelling amount, or a percentage of the TIV (Total Insurable Value – the full value of the insureds covered property including dwelling, other structures, personal property, and loss of use). These deductibles are often higher than AOP deductibles.
- Named Storm Deductible: this is the deductible that will apply to any named storm event like a tropical storm or hurricane. These deductibles are also typically expressed as a percentage and higher than AOP deductibles.*
- Hurricane Deductible: applies only to damage caused by a hurricane. These deductibles are also typically expressed as a percentage and higher than AOP deductibles.*
*An example of which deductible might apply: If a hurricane is downgraded upon landfall to a tropical storm and the insured does not have a named storm deductible, the insureds AOP deductible would then apply sense the damages were not the result of an actual hurricane.
It is important for the consumer to be educated on which deductibles are included in their policy. It is even more important that the consumer have that deductible amount set aside in case of a claim. In the event you have a percentage based deductible, you will want to be sure to understand what the percentage equates to in actual dollars. Here’s an example:
Your home is insured for $200,000
Your contents are insured $50,000
Your AOP deductible is $2500
Your wind and hail deductible is 5%
If the deductible is based on dwelling only, the deductible equals $10,000.
If the deductible is based on TIV (total insurable value including contents, other structures, personal property and loss of use, the deductible equals $12,500.
Click on either of these links to view actual quotes from the same carrier, but each with different deductibles. These illustrate how deductibles influence the annual premium.
Our coastal market was once dominated by 5% wind and hail deductibles; however, there are now many carriers offering Named Storm and 2% deductibles, so be sure to ask your agent what is available in your area. Given the same carrier, lower deductibles often mean higher premium costs, and vice versa. Many consumers find that paying a slightly higher premium is more financially feasible than risking a large out of pocket expense with higher deductibles after a loss.
The examples we’ve given are common types of deductibles for our coastal areas. In other parts of the country, deductibles for earthquakes, landslides, and other natural phenomenon are common. Deductibles for theft are common in commercial policies. Talk with your agent to determine what deductibles are right for you – not just in terms of your yearly premium, but also in terms of what that deductible could actually cost you after a claim.