7/10/2012 7:01 PM ET|
Why you need a $100,000 deductible
Having a homeowners insurance policy with a high deductible can be a great way to save big on premiums.
Did you know you can shave hundreds of dollars off your annual homeowners insurance bill by increasing your deductible? We don't mean just going from $500 to $1,000. Think big. Already have a $2,500 deductible? Then think bigger. Think $100,000.
"We have clients with deductibles of $100,000 fairly routinely on $5 million homes," says Mary Boyd, a senior vice president and the chief operating officer for ACE Private Risk Services. Some ACE clients with multiple homes and a "significant" net worth have deductibles in the millions of dollars, she says. What do they know that you don't?
When you choose a deductible, you're picking a number you're willing to spend out of pocket if you suffer a loss. It should certainly cover what you think of as run-of-the-mill outlays, those incurred when calling the insurer would be more of a hassle than writing a check to the repairman. But if you're comfortable with paying even more in the event of a loss, you can save a lot of money on premiums in the long run.
How much might you save with a higher deductible? On a house insured for $1 million with a $2,500 deductible, a homeowner could save $1,000 a year by going to a $10,000 deductible at ACE. (The premium and savings will vary depending on the house's location and other factors.) Since the homes ACE insures statistically suffer a loss only about once every 20 years, this is a very good bet, says Boyd.
Ted Mitchell, a senior public relations specialist with MetLife Auto & Home, says MetLife has seen a trend toward consumers choosing higher deductibles in recent years. While a typical homeowners insurance policy deductible is $500 or $1,000, MetLife offers flat-dollar deductibles of up to $10,000 (except in Texas, which has percentage deductibles). But you don't have to choose the maximum for the savings to kick in. On a coastal Virginia house insured by MetLife for $1 million, for example, a homeowner could save $300 a year by going from a $1,000 deductible to $2,500, or $600 a year by going to a $5,000 deductible.
Choosing a low deductible is "a characteristic mistake," says Jack M. Guttentag, a professor emeritus at the Wharton School of the University of Pennsylvania, who runs the Mortgage Professor website. "What you want is coverage for the risks that you can't pay for yourself," he says. He advises consumers to pick the amount they're willing to spend out of pocket based on their income and cash savings.
To help minimize the chances -- and severity -- of a loss and your potential out-of-pocket tab, Boyd says homeowners should install not only standard burglar and fire alarms but also consider installing more high-tech safety measures such as automatic leak detectors, battery backup systems for sump pumps and lightning protection systems. You get additional credits on your premium for these efforts.
Your agent might use the savings opportunity to sell you other insurance, but those additional policies might also be good for your pocketbook. Consider this: The ACE homeowners policy covers up to $10,000 in jewelry, with a maximum of $5,000 for a single item, subject to your deductible. That means if you had a $10,000 deductible and lost a bracelet and earrings worth $10,000, there would be no reimbursement. However, you could use the monthly savings on your homeowners policy premium to add on a valuables policy, to insure jewelry, fine arts and other collectibles. With a valuables policy, no deductible applies in the event of a loss.
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