How Big Should Your Homeowners Insurance Deductible Be?

Take these factors into account when you're trying to decide how big your deductible should be.

When you buy homeowners insurance, your policy will come with a deductible. The deductible refers to the amount of money that you're responsible for paying yourself when you have a covered loss.

For example, if your policy comes with a $1,000 insurance deductible and your house sustains $10,000 in covered damage, you would be responsible for paying $1,000 towards repairs, and then your home insurance company would pay $9,000.

Home insurance policies typically come with either a flat deductible, such as the $1,000 deductible mentioned above, or with a percentage-based deductible based on a percentage of your home's value. For example, if you had a 2% deductible on a home insured for $250,000, you'd be responsible for the first $5,000 in repair costs.

You get to choose how large your deductible will be on your policy, which can be confusing to figure out. But considering these key factors will help you decide what size deductible is right for you.

How does your deductible affect your premiums?

If you choose a higher insurance deductible, you will have lower homeowners insurance premiums. That means you will be guaranteed to pay less money each month for your homeowners insurance policy. However, you will have to come up with more money if something actually goes wrong with your home.

If you lower your deductible, though, your insurance premiums will rise. You'll pay more every month, but if a problem occurs that your insurance should cover, you won't have to pay as much out of your own pocket.

There's a tradeoff as to whether you want lower premiums but more future risk, or the opposite.

How much can you afford to pay out of pocket?

It's important to make a realistic assessment of how much you can actually afford to pay if something goes wrong with your home.

If you have a hefty emergency fund and could easily come up with several thousand dollars for home repairs in the event of a problem that your insurance should cover, then you are usually better off choosing a type of homeowners insurance policy with a high deductible. That's because you can use your emergency fund if an immediate problem arises.

And while your emergency fund provides backup, you can put the money that you're saving on premiums by choosing a lower deductible into a special savings account that should eventually grow to be plenty big enough to cover that deductible in full if you need to. Once you've got your "deductible" savings account, all the extra premium savings are just a bonus.

On the other hand, if you choose a deductible that's too high for you to afford, you could be in real trouble if you end up having to come up with the money

How would making an insurance claim affect your future premiums?

When you make a home insurance claim, your premiums will increase in the future. As a result, most people like to reserve their claims for serious and costly repairs that they wouldn't be able to easily afford on their own.

If you're one of those people, it makes sense to choose a high deductible. The higher deductible will help deter you from making claims for only a few thousand dollars worth of damage. And if you're only going to make claims when your insurer pays out tens of thousands of dollars, the difference between a $500 and a $1,000 deductible will matter less than if you'd planned to file a claim for $1,000 in damages.

Ultimately, you need to think about whether you can afford a higher deductible and whether you'd be better off paying for more protection or opting for lower premiums but more risk. For most people, the latter option is the better one, but that may not be the case for you.