In a separate article, we described how buying the cheapest home insurance could be a risky proposition if you’re unknowingly sacrificing coverage.
In this article, we’ll cover a way you can save money by purposely trading coverage for savings in an informed way. This allows you to know the risks you’re taking rather than guess what you are (or aren’t) covered for.
Save Me Time!
- Raising your deductible can be a great way to save money.
- Low deductibles are often overpriced.
- You can also use your savings from a higher deductible to buy back extra coverage to reduce your disaster risk.
The Rest of the Story
Before getting into the details, let’s start with a question:
If I told you there were two ways to save $100 on your insurance premium, which would you choose?
Making the Wrong Choice?
Most people would likely choose the first option. Why take unlimited risk when you can cap your downside? Yet, most insurance buyers instead pick the latter option!
Why? Well, this gets back to some of what the article about cheap insurance discussed. People don’t have the information to understand the risk they’re taking and thus assume that the lower price entitles them to the same coverage as the more expensive policy, even if this is unlikely to be true.
The second choice doesn’t just expose you to more risk. It also increases the odds of you having a bad experience if you do have a claim. If you aren’t informed about what you bought, you are more likely to be surprised when the insurance company says it isn’t covered (or at least not fully covered) and disappointed with your insurer.
The first choice doesn’t just remove worst case outcomes. It actually keeps you from overpaying for insurance you may not need. What is this magic trick?
Revealing the Magic
It’s actually not magical at all. It’s frankly pretty simple. It’s asking your insurer to price your coverage with a higher deductible.
What’s so special about that? Insurance companies overprice low deductibles! While the odds of you having a claim are about once in every 15-20 years, insurance companies price deductibles as if you’ll have a claim every 5-10 years.
This means taking a higher deductible will nearly always save you money over the long term, even if you have claims more often than the average person.
Or to say it another way…keeping that low deductible means you will overpay for insurance unless you have a lot of claims (in which case, whatever you saved from the lower deductible probably gets taken away when the insurer raises your price!).
It also helps you maintain the mindset that home insurance is for unexpected claims not for routine occurrences.
Reinvesting the Savings
The other great thing about raising your deductible is you can use those premium savings to buy more coverage if you like. This extra coverage can remove the risk of the worst case scenario we described earlier.
You can think of this tradeoff as another insurance policy if you like. The reason to buy insurance in the first place is to pay a fixed amount to prevent having to pay an unknown future amount.
Raising your deductible is creating a fixed worst case (the extra $500 or $1000 of deductible you have to pay if you have a claim) to eliminate an unknown worst case when you have a claim (that may not be fully covered because you bought cheap insurance).
Obviously, nothing prevents you from spending more to buy more coverage as well, but, if you’re reluctant to do that, carrying a higher deductible is a great way to afford more coverage while capping your worst case.
Of course, you need to consider whether you can afford a higher out of pocket payment if something bad happens. On the other hand, can you afford the risk of a much larger payment if you skimped on coverage to afford the lower deductible?
And given the short payback period from raising your deductible, you can take your premium savings and put them in a rainy day fund to pre-fund any future claims.
To learn more about the benefits of higher deductibles, please see our deductible calculator tool!