A deductible is the amount of money that an insurance company withholds when paying a homeowner’s insurance claim.
Deductibles exist to reduce moral hazard, such as a homeowner deciding not to install smoke alarms because “insurance will pay for the damage,” or not installing a home security system because “insurance will pay for anything stolen.”
The size of a deductible is chosen by the homeowner.
The most common deductible sizes for homeowners insurance are $250, $500, and $1,000. As your deductible size increases, your annual homeowners insurance policy costs decrease.
Here’s a real-life example of how deductibles work.
Imagine a storm causes damage to your home; a falling tree crashing through your roof. You call a roofing repair company to come out to the house and it assesses the damage for you. The repair estimate is for $1,000.
So, you file a claim with your insurance company.
- If your deductible is $250, the insurance company sends you $750 for repairs
- If your deductible is $500, the insurance company sends you $500 for repairs
- If your deductible is $1,000, the insurance company send you nothing
Deductibles apply to all of the insurance types you might use as a homeowner: homeowners, auto, earthquake, flood, and umbrella insurance.
For help picking your deductible size, read this article on choosing the best deductible for your budget.
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