High or Low Deductible
You’ve recently moved to a new home in a more rural area. It’s a very quiet place to live, however, in your first few years of living there, a couple of bad storms roll through. One even causes a tree to fall on your garage.
It’s now been three years since you’ve moved in and you already have two insurance claims. Your premium jumps up quite a bit this year and you feel helpless. You give your insurance agent a call to see what they recommend.
First, let’s take a look at an insurance term – Deductible. As you may already know or have read in a previous newsletter, your deductible is what you pay out of pocket when you file an insurance claim before the insurance company covers the rest of the cost.
You have deductibles on your auto policy, as well as your home policy. They may be triggered in different scenarios, but the overall concept is the same. Your deductibles will remain consistent unless you request a change to them.
Deductibles have an opposite effect on your insurance premium. Your premium will be more expensive if you have a lower deductible, and less expensive if you have a higher deductible.
Imagine it from the insurance company’s perspective. A high deductible means they shoulder less of the cost of a claim and prevent potential small claims from being submitted. A low deductible means the carrier handles more of the cost, which could lead to smaller claims.
Let’s take a look back at our first example. In order to combat the premium increase, your insurance agent may recommend you raise the deductible on your home policy to lessen some of the increase.
Your agent may also recommend this change in order to reduce the possibility of your insurance company non-renewing your policy due to claims history.
If you take a look back at home insurance policies over the past 30 years, you’d see an interesting trend. Home policies 30 years ago had as low as $100 deductibles.
Flash forward to today, and the average home deductible is about $1,000. The trend we are seeing is more self-insurance among homeowners to reduce the cost of their insurance.
If this trend keeps up, we may see a shift from dollar-amount deductibles to percentage deductibles – usually a small percentage (1% or 2%) of the coverage on your home (Ex: $250,000 of coverage on your home with a 1% deductible = $2,500 paid out of pocket for a claim).
Raising your deductibles on your auto policies is usually done in a couple of different ways. The first is just like the home scenario. You have a couple of accidents in a short period of time that cause your rates to go up. Raising your deductibles can counteract some of this increase.
You may also want to increase your deductibles if you’ve had a number of violations in recent years. Tickets/violations can increase your insurance premium once your insurance company finds out about them.
There is nothing wrong with having low deductibles if you haven’t had poor claims history. Sure, you pay a little more each year in premiums, but you ensure your out of pocket expense is far more manageable.
Having a clean claims history already gives you a low rate, so having average to low deductibles is probably what your agent will recommend.
Where we come in
Bottom line, if you’ve had some bad luck with claims in recent years, you have some options – one being raising your deductible. If you are in this situation, the first thing you should do is have a conversation with your CRG agent.
They can offer solutions for your situation, so you aren’t left at the mercy of rate increases. This is yet another reason having a trusted independent agent is so valuable.