Home Mortgage Alliance Corporation (HMAC)

Balancing deductible and premium: Always a crap shoot

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Published Date 11/5/2024

Insurance is simply termed as the mitigation of risk. True, you pay, and pay, and pay, and most of the time you never get anything back. But which plan do you choose? High deductible and low outlay or low deductible and something equivalent to a car payment each month?

Realtor.com’s Jillian Pretzel says while every homeowner needs home insurance, choosing a plan can be difficult—especially if you’re a first-time buyer and don’t know how much coverage you might need. She begins with terminology — the difference between a deductible and a premium. “A home insurance premium is the amount you pay each month, or year, to maintain your insurance coverage. A home insurance deductible is the amount you pay out of pocket for a covered loss.”

Imagine you're playing a financial game of seesaw - on one end sits your insurance deductible, on the other, your premium. When one goes up, the other naturally comes down. But which balance is right for you?

Pretzel breaks it down with a simple example: Picture a storm damaging your roof, leaving you with a $15,000 repair bill. If you chose a $2,000 deductible, you'll need to chip in that $2,000 first - like an entrance fee - before your insurance company steps in with the remaining $13,000.

Now, here's where it gets interesting. If you pick a higher deductible (like choosing a bigger slice of responsibility), you'll pay less in premiums (your regular insurance payments). Think of it as a financial trade-off: Would you rather keep more money in your pocket now or potentially pay less when trouble strikes?

Looking at real numbers, homeowners with $300,000 in coverage typically pay about $2,230 yearly with a $1,000 deductible. Bump that deductible up to $2,000, and the annual cost drops to $2,046. It's like choosing between a smaller monthly cell phone bill with a bigger charge if you break your phone, versus paying more monthly for peace of mind.

Your location plays a huge role too. Just like beachfront property costs more than a house in the suburbs, insurance varies dramatically by location. Think of it this way: If you live in Florida's hurricane zones or California's wildfire areas, paying less upfront might be smarter since you're more likely to need insurance help. It's like carrying an umbrella in Seattle versus Phoenix - one location clearly needs it more.

But here's the million-dollar question: What can your wallet handle? Experts are split on this one. Some say going for a higher deductible is like putting money in a piggy bank - the premium savings can add up to 12%, which you could save for emergencies. Others argue that the small monthly savings aren't worth the bigger hit if disaster strikes.

The good news? You're not married to your insurance choice. Think of it like a streaming service subscription - you can usually change it later if it's not working for you (just check with your mortgage lender first). When buying a house, you'll need to pay the first year's premium upfront, so some folks choose a higher deductible initially to keep costs down, then switch later when their bank account recovers from the home purchase.

The bottom line? There's no one-size-fits-all answer. It's like choosing between buying in bulk to save money or buying smaller amounts to spend less upfront - the right choice depends on your situation. The smartest move is to shop around and compare options, just like you would for any other major purchase.

In the end, the best insurance plan is the one that lets you sleep at night without worrying about either your monthly bills or potential disasters.

Realtor, TBWS

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