As important as it is to understand how much your home insurance policy will cost you up front, it’s just as important to consider what it will cost in the event of a claim. This is why you need to understand the concept of the deductible and how it works in your policy.
How do home insurance deductibles work?
Your insurance deductible is the portion of an insurance claim you agree to pay on your own, and your insurance company will pick up the rest. Generally speaking, the higher the deductible you choose, the lower your insurance cost will be (all else being equal). Historically, these were put in place to prevent people from filing claims for minor damages. It was expensive for everyone involved, including the clients, because their rates kept going up from filing claims so frequently.
You can set your deductible (just like with auto insurance) in most cases, letting you decide if you’d like to pay less on a monthly basis and risk a higher claims payout, or to have a lower deductible and pay a little more each month.
Every kind of coverage comes with a deductible unless otherwise stated explicitly, and it’s one of the most important home insurance terms you should know!
What is a disappearing deductible for home insurance?
Also called a vanishing deductible for home insurance, the disappearing deductible is an endorsement (add-on) that you can buy to reduce the cost of your deductible over time. It works by reducing your deductible by 20% for every year that goes by without you making a claim until you reach 0%.
It sounds excellent and it certainly can be, but keep these points in mind as well:
- Not everyone is eligible to purchase a disappearing deductible endorsement.
- It carries its own cost to add to your policy, just like any other endorsement.
- The deductible reduction stops after your next claim.
The average home insurance deductible
The average home insurance deductible is $1,000. You can set it higher or lower, but that’s the norm for standard home insurance policies. Lower deductibles are common on auto policies because vehicles can be as cheap as just a few thousand dollars to replace or repair. Homes get a little more expensive, though (a roof replacement alone can be $20,000 CAD).
That’s why it’s not uncommon to see deductibles of $1,000-$2,000. Houses themselves can easily cost $500,000 these days, and that doesn’t include Toronto properties!
With that in mind, what should your home insurance deductible be? That depends on your finances. If you have a healthy reserve of savings and are looking to run a tight monthly budget, then setting a low deductible is feasible. Just keep those savings around in case you need to pay for some damages out of pocket!
The best deductible for home insurance
Everyone asks us what a good deductible is for home insurance, and we tend to recommend $1,000 or $1,500. It can lower your monthly premium a little bit and keeps the deductible within a reasonable range. If you have the financial means to buy a house then you’ll almost certainly have $1,500 in emergency savings to cover unexpected damages.
If you’re choosing between a $500 or $1,000 deductible then we’d recommend going with the $1,000 option. The $500 option is more appropriate for a vehicle than a home, and you don’t want monthly premiums getting too high.
It can be very tempting to set a high deductible at the time of purchase because we all want to pay less for our home insurance. However, it’s important that you set your deductibles to an amount that you can comfortably manage in order to avoid complications.
Why is my home insurance deductible so high?
Most insurers let you choose your deductible at $500, $1,000, $1,500, and (in some cases) even $2,000. It’s something that you choose when you purchase the policy. If you want to change it then the best time to do that is at your policy renewal date, which occurs once per year.
Some people choose high deductibles to save money on a monthly basis, but this can leave them between a rock and a hard place if they can’t afford the deductible. We’d only recommend that option if you have a healthy reserve of emergency savings!
Can you waive the deductible on home insurance?
Some policies may contain clauses that waive the deductible on a given claim if it reaches a high enough threshold. For example, if a natural disaster hit your home and called for a claim of $200,000 to rebuilt it, then you might be eligible for a waived deductible.
We must stress that not every policy or insurer offers deductible waivers. You need to ask your insurer (or us, if you’re with aha insurance), or read the fine print of your policy thoroughly. It’s not too common but it has been known to exist on certain policies.
What if you can’t afford the home insurance deductible?
As a short-term solution you could use a credit card or a line of credit to pay the deductible, but remember that credit comes with interest rates—you need to pay back those loans quickly or else it grows. Lines of credit often have lower interest rates than credit cards, so it’s worth starting your inquiries there (but get a professional opinion on loans—this page doesn’t count). Alternatively you can get a loan from friends or family.
At the end of the day, however, you need to be able to pay the deductible on your home insurance claims somehow. Some insurers want to see that you pay the deductible for your own repairs up-front before issuing the rest of the claim payout.
What are the chances you’ll need to file a claim?
Unless you have a crystal ball that predicts the future, this is one of those impossible questions to answer with any certainty. Just remember that you’ll always have to pay a deductible (by definition) whenever you file a claim. It will depend on the deductible agreed upon in your claim.
Having said that, however, we’ve observed that most home owners don’t file a claim more than once every 5-10 years. It’s different for everybody, though.
You’ll have to rely on history, and you can start with the history of your neighbourhood. If you’ve just moved in, it might be a good idea to chat with your neighbours to find out if the area experiences any regular flooding, storms, or even burglaries that might increase the chances of filing a claim in the future.
When you purchase your policy, you can review your options with your broker and make a decision that suits your budget and lifestyle.