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New Twists on Deductibles

Options help keep premiums lower for homeowners.

The definition of deductible used to be simple: It was the dollar amount, stated in your homeowners insurance policy, that you would pay to repair property damage before your insurance coverage would start to kick in.

In other words, if you had a $1,000 deductible and a fire caused $5,000 worth of damage to your kitchen, you'd pay the first $1,000 to fix it, and your insurance company would pay the remaining $4,000.

But insurers recently have started offering different types of deductibles as a way to keep premiums lower. So an element of homeowners insurance that was relatively straightforward has grown increasingly complicated.

How are deductibles changing?

Three major trends affect deductibles right now. They are:

Higher deductibles. The amount for “flat dollar-value” deductibles has been creeping up in the past few years; where a $250 amount used to be relatively common, many insurance companies now encourage their customers to take on $1,000 or more worth of risk. In fact, some insurers don't even offer the lower deductibles anymore. They aren't the only ones driving this trend: During the recession of 2007–2009 and the subsequent recovery period, many homeowners chose higher deductibles to keep their monthly insurance payments down. Those people often found they were comfortable with the higher risk and kept the higher deductible even after their financial situation improved.

Split deductibles. Insurance companies offer this type of deductible for people who want to take on higher risk for certain types of damage and maintain a lower risk level for others. For example, in some regions of the country, insurers will allow you to have one deductible for wind and hail damage, and another for everything else.

Percentage deductibles. Rather than being set at a flat dollar value, the deductible is stated as a percentage, typically 1 or 2 percent of your “dwelling coverage,” or the amount your policy states you'd need to completely rebuild your house (not including replacing the contents). In other words, if your dwelling coverage is $300,000 and your deductible is 1 percent, you'd pay the first $3,000 of any repair. Percentage deductibles are often higher than flat dollar-value deductibles, but they also typically come with a lower premium.

How can I make sure I have the right deductible?

With these new options, it can be hard to know which type of deductible is best for you. In general, insurance is meant to protect you from big losses, not cover the little things you can afford to fix yourself, which is why some people choose a higher deductible. If you go that route, keep in mind that you'll be on the hook if something catastrophic happens to your house. For instance, if your deductible is $3,000, you'll need to come up with that amount if you experience a major loss.

Whatever you do, always read through your renewal packet when it comes each year. If you have questions about deductibles, talk to your insurance agent. It's better to take a few minutes to clarify things now than to get another unpleasant surprise after a disaster.

Robin Jones is a contributor from Long Beach, Calif.

Your AAA insurance agent can provide more details. Stop in at your local AAA branch, call (888) 222-2582, or click on AAA.com/insurance.

May/June 2016 Issue

ask an agent

Q: Why do increased deductibles keep premiums low?

Eaton

A: When you increase your deductible, you are agreeing to pay a greater share of any claims against your policy. As you are assuming more risk, your carrier can reduce your premium. For example, the average water damage loss to a home is about $15,000. By raising your deductible from $1,000 to $2,500, you are agreeing to contribute more to the repair. People with higher deductibles are also less likely to make claims for small expenses. This lowers the cost to your insurer, so you pay a lower premium.

– Lynne Eaton
AAA Sales Agent
St. Peters, Mo.


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