Why Insurance Deductibles Should Be So High They Hurt

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By Brian O'Connell

NEW YORK -- You can save up to 41 percent in home insurance premiums if you raise your policy's deductible -- but there is risk.

Insurers will charge you less in premiums if you hike your deductible, although the amount you save depends on what state you live in, and often works in their favor by putting more financial burden on the homeowner in the case of such problems as fire or flood.

For example, if a small fire causes $4,500 in damage to your home and your policy has a $5,000 deductible, you're on the hook for the entire cost of repairs.

%VIRTUAL-pullquote-Since savings vary so much from state to state, consumers need to consider the bottom line before increasing deductibles.%"Since savings vary so much from state to state, consumers need to consider the bottom line before increasing deductibles," says Laura Adams, senior analyst at InsuranceQuotes.com. "While switching from a $500 deductible to a $5,000 deductible sounds appealing because it lowers home insurance premiums by an average of 28 percent, it could be a risky move for consumers who don't maintain that much in savings."

Of course, homeowners can raise their deductibles less. Boosting a policy's deductible to $2,000 from $500 saves a homeowner 16 percent, on average, according to InsuranceQuotes.com.

Some states are more generous on their homeowner insurance rates than others. North Carolina for example, allows homeowners to save 41 percent on their policies by raising out-of-pocket deductibles. Rhode Island (26 percent) and Florida (23 percent) residents can also save big.

On the other end of the spectrum on saving with deductibles are such states as Hawaii (at 4 percent savings) and Texas (6 percent).

Insurance industry experts say the decision is really based on how you view homeowner's insurance.

"If your deductible doesn't hurt, it's not high enough," says Kevin Foley, an insurance broker at PFT&K Insurance Brokers in Milltown, New Jersey. "Why so high? Because insurance is for disasters -- things that make you drop to your knees and thank God you have insurance. It's not for maintenance."

Consequently, you shouldn't use your insurance unless you absolutely have to, Foley adds. "Having a low deductible lures you into wanting to use the insurance when you have minor problems," he says. "What's $250, if the insurance pays the other $1,750?"

"The problem with that is most insurance companies allow you two strikes in three years and then they cancel you," Foley explains. "Replacement insurance is unbelievably expensive, and you're stuck with it for three years before anyone will talk to you. Plus, you can't hide from your losses, because they all share information."

Some homeowners agree that raising insurance deductibles was good for them.

"We significantly increased our home deductible and saved 32 percent on our homeowner's and our auto insurance," says Mark Zoril, founder of PlanVision, a Plymouth, Minnesota-based financial services firm.

Zoril's process was straightforward. "I reached out to six different firms and could have reached out to many more -- Farmers, American Family, Liberty Mutual, Travelers and AAA ... I imaged copies of all of our policies with Allstate and sent them to each office. I told them to just match the coverage and provide a quote.'

Zoril ended up choosing Liberty Mutual and raising his homeowner's policy deductible to $10,000. "We decided to treat our home insurance as coverage for a catastrophic event," he explains. "This reduced our premium a lot. [But] our risk is that our house or roof will suffer severe damage in a storm or weather event."

-Written by Brian O'Connell for MainStreet.com.
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