About Catastrophic High-Deductible Homeowners Insurance

by Emily Beach

    Just as in health and auto insurance, premiums for homeowners insurance vary inversely with the amount of the deductible, the out-of-pocket cost you must pay on a claim. To reduce your homeowners insurance expense, consider a catastrophic high-deductible plan. While these plans make it more difficult to claim small incidents, such as a minor break-in, they allow you to keep more money in your pocket throughout the year while protecting you from major events.

    How It Works

    With a traditional homeowners insurance policy, consumers pay a monthly premium in exchange for insurance that covers a variety of home-related risks, from fire to break-ins to mysterious mold problems. The exact coverage terms vary greatly among policies. When an unforeseen event takes place, such as a burglar stealing expensive tools from a garden shed, the homeowner files a claim with the insurance company. After the homeowner pays a relatively small out-of-pocket deductible, the insurance company issues a check to cover other costs associated with the event. In this example, the company might pay to repair the shed and replace the stolen tools. Designed to pay out only during a catastrophic event, high-deductible plans work slightly differently. Consumers pay a much lower premium each month, but take on greater risk. In our stolen tools example, the deductible associated with the policy could be so large that it doesn't make sense for the homeowner to file a claim. Instead, he'll simply pay for the repairs and the replacement tools out-of-pocket. If a catastrophic event took place, such as a major fire, the cost of repairs would likely be higher than the deductible, so it would make sense for the homeowner to file a claim in this type of situation.

    Size of Deductibles

    Forbes suggests choosing a plan that covers the risks that you can't afford to or aren't willing to pay for yourself. A $100,000 deductible plan is perfectly reasonable if you can afford to pay out-of-pocket for a major home repair or emergency that costs $99,000. Evaluate your income, total savings and your comfort level with risk to determine the right deductible for your family.

    High-Deductible Plan Savings

    The higher your deductible, the more you can cut your monthly premiums. The U.S. Insurance Information Institute estimates that going from a $500 to $1,000 deductible can cut monthly premiums by 25 percent. Forbes reports that going from a deductible of $2,500 to a $10,000 deductible can save homeowners roughly $1,000 per year.

    Drawbacks of High Deductibles

    While it's easy to be drawn into a high-deductible plan because of its lower premium costs, these plans aren't the right choice for every homeowner. In addition to the added risk, consumers should also be ready to pay for more home-related costs out-of-pocket. Putting the money saved on premium bills in the bank can help homeowners have cash on hand to pay for repairs and other expenses when it doesn't make sense to file a claim.

    Other Ways to Save

    While choosing a catastrophic plan can help you save on homeowners insurance, it's not the only way to cut costs. The U.S. Insurance Information Institute recommends bundling your homeowners insurance with other types of insurance from the same carrier to save on premiums. You can also cut premium costs by maintaining a good credit rating or by taking steps to make your home more resistant to damage and break-ins.

    Photo Credits

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    About the Author

    Emily Beach works in the commercial construction industry in Maryland. She received her LEED accreditation from the U.S. Green Building Council in 2008 and is in the process of working towards an Architectural Hardware Consultant certification from the Door and Hardware Institute. She received a bachelor's degree in economics and management from Goucher College in Towson, Maryland.

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