Home Insurance Premiums and Deductibles - Navigating the Lingo
Home insurance pricing is really a pair of prices: premiums and deductibles. The premium is what you pay to the insurer, and the deductible is the amount of money you might have to pay to another party. Or not.
The deductible is the maximum amount you have to pay out of your own funds before an insurer will reimburse a claim you submit. When you need to take care of repairs, medical bills, legal fees or the replacement of stolen items, you file a claim to the insurance company for reimbursement. The deductible is subtracted from the value of the reimbursement, and then any remaining amount is given to you by the insurer. That's assuming you've filed a claim that complies with the conditions described in the insurance policy. Usually, this means supplying proof of the damage or loss, and a receipt or written estimate of the cost.
If you don't want to pay with your own cash to cover the cost of repairing damage or replacing stolen items, then you can choose a higher premium. However, this is not an all-or-nothing choice, but rather a spectrum of options. Premiums and deductibles are counterpoised. Raise one and the other goes down.
It's easy to presume that a higher premium is more expensive than a higher deductible, when in fact they are a lot like the expression, "six of one, half a dozen of the other." Many people opt for a high deductible in order to get the lowest premium. Then when something happens to their home that requires a repair or replacement, a lesson is learned the hard way: The high deductible means a lot of the cost of repairing damage or replacing stolen items comes from the policyholder's own pocket. Suddenly those low premiums don't seem so cheap anymore. A deductible that's too high is just like anything else you can't afford – expensive.
If you can't afford a high deductible, consider how much more you'd be willing to pay in premiums. If you've got a monthly budget already drawn up, now's a good time to revisit it. Otherwise, this is a good a reason as any to create a budget. Draw up a list of your monthly income and expenses. Then examine whether there's anything you'd feel comfortable cutting back on in order to free up funds for more expansive insurance coverage.
Ask your insurance agent or insurer about options for lowering your deductible, and mention the additional amount you'd be willing to pay in higher premiums. Usually the company you already work with will be able to supply quotes of different premium-and-deductible combinations than what you currently have. If none of the quotes meets your expectations, perhaps another insurer could serve you better.
Many state regulators offer listings of average premiums offered by different home insurers, but these figures are, well, averages. They're not necessarily going to be the same as the quotes you might receive from different insurance companies. If your credit score is average, then you'll see similarities between the prices you are offered and the listings supplied by your state regulator. If your credit score is above average, you may receive offers that are cheaper than the listings.
If your credit score is below average, consider taking steps to improve it. A below average credit score has the same consequences for insurance prices as it does for mortgage interest rates: Higher costs. The money you would pay in higher premiums would be better spent paying down bills that have gone into collections and outstanding balances on loans and credit cards, since those are the things that result in a poor credit rating.
Credit ratings' role in home insurance prices is a whole other conversation we need to have. Understanding them, along with the way premiums and deductibles are set up, will help you navigate your way to a better deal on coverage for your dwelling, personal property and legal responsibilities.