Frequently used in property damage insurance, a buyback deductible is a provision that lets you pay a lower deductible when you have a claim that exceeds your original deductible. Sometimes offered by the same company that sells you your insurance, buyback deductibles might not make sense at first. However, they're a brilliant solution to a common problem.
What Insurance Companies Hate
Insurance companies hate claims. Claims don't just cost money in terms of awards, either. When you have a claim, you contact your insurer to let them know, and the company sends out an adjuster to process the claim. While it's doing its research, the company is spending hundreds or thousands of dollars on it so that it can eventually send you a check. High deductibles don't make a big difference to an insurer on a big loss. If you experience a $305,000 loss when your house burns down, the difference between sending you a $304,500 check after your $500 deductible or a $300,000 check after your $5,000 deductible isn't that great. Where a high deductible makes a difference is if you have a small loss -- when you have a $2,000 loss, you won't call your insurer at all if you have a $5,000 deductible, but you'll definitely collect it if you have a $500 deductible.
The High Deductible Problem
Opting for a high deductible can be problematic for individual homeowners though. You might be able to afford the cost of a minor repair -- like if you break your own window or even if a neighbor's kid throws a ball through it. In fact, more and more consumers are already choosing higher deductibles and paying these types of expenses out of pocket. (ref 7) However, if you lose your house and the clothing you need to wear so that you can go to work, having to come up with a $5,000 deductible to get any help from your insurer can seem unfair or even be impossible for you.
A buyback deductible gives both you and your insurance company what you want. With a buyback deductible, your policy's main deductible stays high, meaning that you can't make a claim for a minor loss. However, when you purchase a buyback policy and have a major loss, your deductible drops down. For instance, you could purchase a policy that would cover $9,800 of your $10,000 deductible.
Types of Buyback Deductibles
While buyback deductibles are readily available for homeowners and commercial property policies, they're also available for other types of insurance. One insurer offers an opportunity to buyback your glass deductible, while others will sell you a policy that reduces your collision deductible if you wreck someone else's car. Policies can cover earthquake damage as well and homeowner's buyback policies cover anything that your homeowner's policy would cover. There's really no limit on what a buyback deductible can cover -- you just need to find an insurer that will sell the product to you.
- Insurance Journal: USHT Offering Texas Homeowners Deductible Buy-Back Coverage
- Abacus Insurance: Earthquake Deductible Buyback
- Travelers: What to Expect from the Property Claim Process
- Bankrate: How to Choose an Insurance Deductible
- Forbes: The Smartest Homeowner's Insurance Move: A $100,000 Deductible!
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.