When you compare insurance costs, it’s important to consider the deductible. If you experience a claim, the deductible will have a direct impact on your out-of-pocket costs. Landlord insurance deductibles can be somewhat complicated, and a single policy may contain more than one, so it’s worth taking some time to understand the impact on your coverage.
What Is an Insurance Deductible?
An insurance deductible is the amount that you have to pay if you file a claim. The deducible is often a set amount. For example, a policy might have a flat deductible of $1,000. However, deductibles can also be a percentage of the policy limit. For example, a deductible might be 3% of the policy limit.
If you file a claim and a deductible applies, you have to pay the deductible. The insurer pays the rest of the claim, up to the policy limit. This means that the amount of the deductible is subtracted from the claims payout. For example, let’s say you’ve adequately insured your property for $200,000 with a $1,000 deductible. A fire results in a total loss. You’re responsible for the deductible, and the insurer pays $199,000, which is the policy limit minus the deductible.
A single insurance policy may have multiple deductibles that apply to different types of losses, such as hurricane losses.
Explaining Insurance Deductibles
Deductibles can be seen as a way of risk sharing. When you purchase insurance, the insurance company is taking on the majority of the risk, but you retain a portion of the risk in the form of the deductible.
According to Investopedia, sharing risk in this way can incentivize policyholders to manage their risks. If they file a claim, they will have to pay a portion, so it is in their best interest to prevent losses whenever possible. In this way, both the insurer and the policyholder have the same goal. The use of deductibles can also help insurers achieve financial stability.
What Is a Low Deductible?
Some landlord insurance deductibles are as low as $500 or $1,000. However, whether you can secure a deductible this low will depend on several factors, including your level of risk and the value of your property. Policies with lower deductibles typically have higher premiums.
What Is a High Deductible?
Deductibles can be much higher than $1,000 or $2,000. Some are $5,000, $10,000 or more. If you have a high-worth property, or if your risk level is high, your policy may come with a higher deductible. Some landlords intentionally opt for higher deductibles to reduce their insurance premiums.
Percentage-based deductibles can also end up being very expensive. According to the Insurance Information Institute, hurricane deductibles are often between 1% and 5% of the property’s insured value.
Earthquake deductibles can be even more expensive, ranging from 1% to 20% in high-risk areas.
If your property is insured for $500,000, a 5% deductible is $25,000, and a 20% deductible is $100,000. That’s a lot of cash to pay out of pocket if you experience a loss.
What Is the Upside to Having a High Deductible?
Having a high deductible may seem like a bad thing, but it can actually be part of a smart risk management strategy.
In general, the premium cost decreases as the deductible increases. Therefore, by increasing your deductible, you may be able to reduce your premium costs. If you have strong risk management strategies in place and you succeed in preventing losses, you can save money this way.
However, it’s important to remember that when you select a higher deductible, you are agreeing to take on more risk. Some losses are out of your control. For example, you can harden your property against fires and storms, but there is still a chance that a fire or storm will damage your property. If a loss occurs and you can’t afford the deductible, you will be in a very precarious situation. It’s therefore important to make sure you have the funds necessary to cover your deductible.
A good deductible is one that balances your acceptable costs with your appetite for risk. The deductible that fits your financial and risk management needs may not be the deductible that meets the needs of another property owner.
An Example of How a Deductible Might Play Out
Insurance terms can seem abstract. When you read your policy, you might be tempted to decide that all of these details don’t really matter to you. The truth, however, is that these details absolutely do matter, and if you experience a claim, you’ll see that firsthand.
A hypothetical example can show why the deductible is important.
Let’s say you have an older property with a replacement cost of $800,000, and you wisely insure it for the full amount. You have a flat deductible of $5,000.
A wind storm damages your roof. It will cost $4,500 to repair it. You assume that this will be covered by insurance, but then you remember the deductible. Because the claim is less than the deductible, you’re responsible for the full amount.
Later, a vandal damages your gates and the exterior walls of your building. Your policy includes coverage for vandalism, but you’ll need to pay the deductible again. The damage comes to $15,000. You pay $5,000, and the insurer pays the remaining $10,000.
The next year, a fire destroys your property and everything around it. You pay the $5,000, and the insurer pays $795,000 so you can rebuild your property. Because you also purchased ordinance or law coverage, your insurance carrier also covers the added cost of updating your building’s old electrical system up to current standards.
When you review your insurance options, there are a few things to keep in mind.
- You may have different deductibles for different losses. Review your policy for details.
- If you file a claim, you will be responsible for paying the deductible. Make sure you have the funds to do so.
- Losses that are less than the deductible will not be covered by insurance. You are responsible for these losses.
- By selecting a higher deductible and implementing strategies to prevent losses, you can lower your costs.
Do you need help securing landlord insurance that meets your coverage and budget needs? Honeycomb offers fully customizable landlord insurance. Learn more.