Home and auto insurance can help you bounce back after experiencing a covered financial loss, but that might not be the case if you can’t afford your deductible. Bankrate’s annual emergency savings report found that 59 percent of U.S. adults are uncomfortable with the amount of emergency savings they currently have, with 56 percent reporting that they would not pay an emergency expense of $1,000 or more from their savings account. Given that auto and home insurance deductibles usually range from $500 to $2,500, many Americans could face a serious challenge if they needed to file a claim.
Increasing your deductibles to lower your insurance premiums may save you money in the short term, but it can put you in a precarious financial situation if you can’t afford your home insurance deductible and need to file a claim. Along with finding an insurance company that offers the coverage you need for an affordable premium, choosing appropriate deductibles and putting emergency money aside can help ensure you can afford to use your insurance if you need to.
How much do I need to save to pay my deductible?
Auto, home and renters insurance have various insurance deductibles ranging from as low as $50 to over $5,000 depending on the state and coverage options. Deductibles in the $500 to $1,000 range tend to be the most popular. In cases of extreme weather, it is common to have damage to your dwelling or personal property and your vehicle, meaning you will likely need to have the combined total of your property and auto deductibles available to you at the time of a loss.
To make sure you’re prepared to pay your deductible, let’s look into how deductibles work for some common types of insurance: home, renters and auto.
Understanding how your deductible works
Insurance policies are a way for policyholders to transfer the risk of a financial loss to an insurance company. The insurer then assumes the bulk of the financial burden from covered losses. An insurance deductible allows policyholders to retain a small amount of the risk, thereby eliminating small claims and lowering the price of coverage overall.
When your insurance company approves a claim under coverage that has a deductible, you will receive the appropriate claim amount minus the deductible. Depending on the type of policy, the claim check can be written directly to the policyholder, to the mortgage company or collision repair shop, or to both. It may be your responsibility to pay the deductible directly to the repair shop or contractor, and not having the money to do so can delay or stop the repairs.
It’s also important to know that your property and auto insurance deductibles work on a per-incident basis. While you can meet your health insurance deductible on an annual basis, you’ll need to pay your home, renters or auto deductible with each claim.
Could you comfortably do that? To find out, pull out your insurance policies, whether you have paper copies or view them online. Locate your deductibles, then identify what will be required in the event of a claim.
The phrase ‘pay your deductible’ can be a little misleading. In most cases, after you file a claim, your insurer pays your claim to you or the repair shop or contractor with your deductible already taken out. Instead of thinking of your deductible as a separate bill you need to pay, it helps to think of it instead as the amount you’ll need to go without from your insurance provider.
— Natalie Todoroff, Bankrate insurance analyst
Auto insurance deductibles
Car insurance deductibles typically come into play if you have comprehensive and collision coverage. These coverage types usually make up a full coverage car insurance policy. However, other coverage types also have deductibles, such as personal injury protection (PIP) and uninsured motorist property damage. Each one of these coverage types has separate deductibles, and you could be responsible for more than one deductible if you are involved in a car accident.
If the cost to repair damage to your vehicle following a covered loss is less than the amount of your deductible, you won’t be able to file a claim and will need to pay for the repairs out of pocket. That’s why a lower deductible, such as $500, works for many people — paying an unexpected repair bill of more than $500 might not be realistic for your budget. But a lower deductible also comes with slightly higher premiums, which is why some car owners set their deductibles at $1,000 or more and agree to pay the cost of any repairs worth less than that amount.
Renters and homeowners insurance deductibles
Looking at property insurance, including homeowners, condominium and renters policies, you’ll usually only have to choose one deductible amount. That’s what you’ll pay after a covered incident to repair or rebuild your home or replace your belongings. The most common home insurance deductibles are $500 or $1,000, though higher options may be available.
If you live in a hurricane-prone area, your policy might include separate wind and hail deductibles. These are typically a percentage of your home insurance’s dwelling coverage amount. Standard options are 1, 2, 5 and sometimes 10 percent. When considering a higher wind deductible, ask your insurance agent for home insurance quotes with various deductible options to better understand the price difference.
Renters insurance helps pay for personal property, loss of use and personal liability, but the deductible only applies to personal property. You can start replacing and repairing your items once you receive your claims check minus the deductible amount. However, when a home is being fixed or rebuilt, you will need to have the missing deductible amount to pay the contractor. If you can’t afford your home insurance deductible, it could delay or stop repairs.
How will my deductible affect my premium?
When choosing your deductibles, keep in mind that the amount you select will influence your premium. A high deductible signals that you are assuming more risk because when a claim is filed, the insurance company will have to pay less money. For this reason, a high deductible translates to a lower premium and vice versa.
Here is how different deductible options impact the average cost of a homeowners insurance policy with $300,000 in dwelling coverage:
- $1,000 deductible: $2,230 per year
- $2,000 deductible: $2,046 per year
- $5,000 deductible: $1,835 per year
The two higher deductibles result in a decrease of 8 percent and nearly 18 percent, respectively, compared to a $1,000 deductible. Keep in mind, however, that the impact on your premium can vary based on the policy type and even the coverage type. This is why most experts recommend comparing personalized quotes before adjusting your deductibles.
What to do if you can’t pay your deductible
If you can’t pay your auto or home insurance deductible, you won’t be able to file a claim and get your repairs covered. But you might not be stuck paying the whole amount out of pocket if you follow these steps:
- Be patient: If you’re close to having the full deductible amount and the repairs aren’t urgent, you may be able to save up and submit a claim later in order to have the repairs covered. But you can’t wait indefinitely — ask your insurance agent about a claim deadline.
- Shop around: Not all repair shops or contractors will charge the same amount for repairs, so try to get quotes from multiple sources. For car repairs, independent shops often charge lower rates compared to dealerships.
How to choose the right deductibles for your budget
When it comes to budgeting for emergencies, most of us won’t be able to guess when it’ll happen or how much it’ll cost. However, when it comes to auto and property insurance, we do know how much it will cost — the amount of the deductible you selected.
When choosing your deductibles, it may be helpful to consider the following questions:
- What are my deductible options? Look at the range of deductibles your carrier offers and consider how each one potentially affects your budget.
- When would I have to pay this deductible? Consider the coverage type and when you would need to use it. If you had to pay multiple deductibles at the same time, how would that impact your savings?
- How does each deductible impact my premium? Compare personalized quotes to see how each deductible option affects your premium.
Bankrate’s survey found that 27 percent of U.S. adults have no emergency savings. While your insurance deductibles may be low on your list of financial priorities, understanding your deductibles in advance could help you prepare for an emergency that forces you to pay them. One accident where you can’t pay to have your car repaired in time to get to work could be the first step in a chain reaction that wreaks havoc on your personal finances. In other words, it might be worth paying a little more in premiums each month to get your deductible to a point where you know you have the money on hand to cover it.
Methodology
Bankrate utilizes Quadrant Information Services to analyze July 2024 rates for all ZIP codes and carriers in all 50 states and Washington, D.C. Quoted rates are based on married male and female homeowners with a clean claim history, good credit and the following coverage limits:
- Coverage A, Dwelling: $300,000
- Coverage B, Other Structures: $30,000
- Coverage C, Personal Property: $150,000
- Coverage D, Loss of Use: $60,000
- Coverage E, Liability: $500,000
- Coverage F, Medical Payments: $1,000
The homeowners also have a $1,000 deductible, a $500 hail deductible and a 2 percent hurricane deductible (or the next closest deductible amounts that are available) where separate deductibles apply.
These are sample rates and should be used for comparative purposes only. Your quotes will differ.
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