Increasing numbers of Americans are using a simple method to cut their home insurance bill – but here’s why it is a risk
Americans are taking out home insurance polices with increasingly large deductibles in a bid to mitigate rocketing premiums – but experts warn that the strategy carries risk.
A home insurance deductible is the amount a homeowner will have to pay out of pocket before the insurer will contribute to the cost of a claim.
Higher deductibles generally mean lower premiums, but you could end up being caught out if your home is vulnerable to damage.
In 2023 new home insurance policies with deductibles greater than $2,000 were up 44 percent on the year prior, while those with deductibles of just $500 were down 16 percent, according to data from insurance agency Matic.
‘Deductibles have become a very big issue,’ said Charles Nyce, an associate Professor of Risk Management and Insurance at Florida State University’s College of Business. ‘But it’s dangerous, there will be people who who have losses they cannot afford to have.’
In 2023 new home insurance policies with deductibles greater than $2,000 were up 44 percent on the year prior, while those with deductibles of just $500 were down 16 percent, according to data from Matic Insurance
The shift in the market comes as the national average for home insurance premiums is rocketing. According to Bankrate, the average cover on a $250,000 home is up 20 percent from 2022 to $1,428 a year.
Homeowners in natural disaster-prone areas such as Florida are having to pay an even more inflated rate – with some people being charged up to $6,000 a year for coverage – as companies are increasingly struggling to profit.
‘In Florida, we have a huge hurricane exposure, number one, and number two, we were having some fraud issues in the market as well. So insurance companies were suffering substantial losses,’ said Nyce.
In July, national insurer Farmers Insurance became the latest firm to announce it would no longer cover homes or cars in the state, citing the rising risk of hurricanes.
Charles Nyce, an associate Professor of Risk Management and Insurance at Florida State University’s College of Business, suggested consumers should consider protecting their homes from natural disasters to reduce premiums
For new policies effective in 2023, the proportion with deductibles between $1,000 and $1,500 was down by 10 percent on the year prior, while those between $2,000 and $2,500 were up 46 percent, according to Matic data.
Nonetheless, the $1,000 to $1,500 bracket remained the most common in 2023 – with 70.75 percent of homeowners still having deductibles in that range.
Rising premiums are leading some people to give up insurance altogether.
As of June of this year, 88 percent of homeowners were insured across the country, down from 95 percent in 2016, according to the Insurance Information Institute.
For homeowners, boosting their deductible can be a strategy to reduce their premium – while ensuring they still have cover.
While some homeowners are taking it upon themselves to increase their deductible, others are actively urged to do so by their insurer, according to Matic.
‘The agent will often be the one that makes the suggestion first,’ said Nyce.
‘That’s important, he said, because an agent is unlikely to be familiar with the specifics of a customer’s financial situation.
‘Individuals that are not well versed in insurance probably aren’t aware of all the options that are available so it comes to the agent to be able to inform them of all the different choices,’ he said.
But people have to be prepared to cover the promised portion of a deductible if and when a loss occurs, he warned.
Many deductibles are given in fixed dollar amounts, but others are given as a percentage of the home’s insurance premium – typically ranging between 1 and 2 percent of its value.
There are also various types that consumers can opt for. While standard insurance covers wind and hail damage from storms and hurricanes, separate natural disasters are usually covered by their own deductibles.
In Florida, one of the most frequently imposed on homeowners insurance is a 2 percent deductible for hurricane losses.
That means homeowners will be responsible for the first 2 percent of the insured value of the home in the event of a claim. For a $500,000 home, that will be $10,000.
‘There are studies in the United States that say things like 50 percent of households cannot afford a $500 unexpected loss. They just don’t have that rainy day fund to cover it. And when you start talking about 2 percent of a $500,000 home, that’s a big pay day,’ said Nyce.
In Florida, one of the most frequently imposed on homeowners insurance is a 2 percent deductible for hurricane losses. Pictures are rescue personnel performing a search in the aftermath of Hurricane Michael in Mexico Beach, Florida, in 2018
He suggested that there are alternative things consumers can do in order to fair best when insuring their homes.
Firstly, he advised going out of the way each year to actively look for new new coverage. ‘You may be able to find an insurer offering a lower premium,’ he said.
He also said consumers should pay attention to their limit, which is the highest amount the insurer will pay for a claim. While it’s important to make sure that the amount would cover the cost of a rebuild or a repair, it need not be unnecessarily high.
Finally, homeowners should inquire into which discounts are available and what steps they need to take to access them. For example, Nyce said that in Florida discounts are available for taking steps to protect a house against hurricanes, and that there may be grants to fund undertaking that work.