What is a percent-based deductible?
Traditionally, deductibles are set at a fixed dollar amount. For example, if you have a $1,000 deductible and file a claim for $5,000, you would pay the first $1,000, and your insurance company would cover the remaining $4,000..
A percent-based deductible, on the other hand, is calculated as a percentage of your home’s insured value. So, if you have a home insured for $500,000 and a 1% deductible, your out-of-pocket expense for that same claim would be $5,000. That’s right, you’d pay the entirety of that claim out of pocket.
Why do insurance companies use percent-based deductibles?
Insurance companies use percent-based deductibles to help manage risk. When a home’s insured value increases, so does the potential payout for a claim. A percent-based deductible helps ensure that homeowners are sharing in the risk of a loss.
For example, if you have a $500,000 home with a $1,000 deductible and a $10,000 claim, your out-of-pocket expense would be $1,000. However, if your home is insured for $1,000,000 and you still have a $1,000 deductible, your out-of-pocket expense for the same $10,000 claim would be only 0.5% of your home’s insured value. A percent-based deductible ensures that your out-of-pocket expense is more proportionate to the insured value of your home.
How does a percent-based deductible impact me during a claim?
If you have a percent-based deductible, the amount you owe out-of-pocket during a claim will be based on the insured value of your home. This means that if the insured value of your home has increased since you purchased your policy, your out-of-pocket expense may be higher than you expect.
For example, let’s say you purchased your home for $300,000 and insured it for that amount. Over time, the value of your home has increased, and it’s now worth $500,000. If you have a 1% deductible, your out-of-pocket expense for a $10,000 claim would be $5,000, rather than $3,000 if your home was still insured for $300,000.
It’s essential to review your policy regularly to ensure that the insured value of your home is up-to-date and that you have the coverage you need.
How can I manage my out-of-pocket expense with a percent-based deductible?
While you can’t control the insured value of your home, there are ways to manage your out-of-pocket expense during a claim.
First and foremost, it’s crucial to have adequate insurance coverage. If you have a percent-based deductible, your out-of-pocket expense will be based on the insured value of your home. So, if your home’s insured value is too low, you may end up paying more out-of-pocket than you should.
Additionally, you can consider moving to a flat, dollar-based deductible. A dollar-based deductible may increase your premium in the short term, but it could save you THOUSANDS of out-of-pocket expenses during a claim.
While percent-based deductibles do have their place in the world, they put more risk on you, the homeowner, when it comes time to file a claim. If you have any questions about this or other coverage questions, feel free to book a call with our team or import your policies for a full review using the links below.
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