Americans are buying home insurance policies with increasingly large deductibles in an effort to mitigate rising premiums, but experts warn this strategy comes with risks.
A home insurance deductible is the amount a homeowner must pay out of pocket before the insurer contributes to the cost of a claim.
Higher deductibles generally mean lower premiums, but you can get caught if your home is vulnerable to damage.
In 2023, new home insurance policies with a deductible of more than €2,000 were up 44 percent on the previous year, while those with a deductible of just €500 fell by 16 percent, according to data from insurance company Matic.
The shift in the market comes as the national average for home insurance premiums skyrockets. According to Bankrate, the average coverage for a house of € 250,000 has increased by 20 percent compared to 2022 to € 1,428 per year.
In 2023, new home insurance policies with deductibles of more than $2,000 were up 44 percent from the previous year, while those with deductibles as low as $500 fell 16 percent, according to data from Matic Insurance.
Homeowners in areas prone to natural disasters, such as Florida, are having to pay an even higher rate — with some people paying as much as $6,000 a year for coverage — as companies increasingly struggle to make a profit.
In July, national insurer Farmers Insurance became the latest company to announce it would no longer cover homes or cars in the state, citing the increasing risk of hurricanes.
For new policies taking effect in 2023, the share with deductibles between $1,000 and $1,500 was down 10 percent from the year before, while those between $2,000 and $2,500 were up 46 percent, according to Matic data.
Nevertheless, the €1,000 to €1,500 bracket remained the most common in 2023 – with 70.75 percent of homeowners still having a deductible in that range.
Charles Nyce, associate professor of risk management and insurance at Florida State University’s College of Business, suggested consumers should consider protecting their homes against natural disasters to lower premiums.
Rising premiums are causing some people to give up insurance altogether.
As of June this year, 88 percent of homeowners nationwide were insured, up from 95 percent in 2016, according to the Institute for Insurance Information.
For homeowners, increasing their deductible can be a strategy to lower their premiums while ensuring they still have coverage.
While some homeowners are taking it upon themselves to increase their deductible, others are actively encouraged to do so by their insurer, according to Matic.
But people should be prepared to cover the promised portion of the deductible if and when a loss occurs, warns Charles Nyce, associate professor of risk management and insurance at Florida State University’s College of Business.
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 10 percent of its value.
There are also different types for consumers to choose from. While standard insurance covers wind and hail damage from storms and hurricanes, individual natural disasters are usually covered by their own deductible.
In Florida, one of the most common homeowners insurance policies is a 2 percent deductible for hurricane losses, according to Nyce.
This means that in the event of damage, homeowners are responsible for the first 2 percent of the insured value of the home. For a $500,000 house, that’s $10,000.
“Many households cannot afford to absorb a $10,000 loss,” Nyce said.
‘There is a real risk that many policyholders will not be able to pay the deductible, which may delay repairs and/or not allow all losses to be recovered.
“For example, we may be able to repair the house but not replace the damaged property.”
In Florida, one of the most common homeowners insurance policies is a 2 percent deductible for hurricane losses. Photos show rescue personnel conducting a search in the aftermath of Hurricane Michael in Mexico Beach, Florida, in 2018
Nyce suggested there are alternative things consumers can do to best insure their homes.
Firstly, he advised to actively look for new new coverage every year. “You may be able to find an insurer that offers a lower premium,” he said.
He also said consumers should pay attention to their limit, which is the most the insurer will pay for a claim. Although it is important to ensure that the amount covers the costs of a renovation or repair, it does not have to be unnecessarily high.
Finally, homeowners should research what rebates are available and what steps they need to take to access them. For example, Nyce said that in Florida, rebates are available for taking steps to protect a home from hurricanes, and there may be grants to fund that work.