Expenses in Waiting: Managing Costs on Your Property and Casualty Insurance
You may not think of the deductibles and liability limits on your insurance policies as part of your financial strategy, but they could make a difference in your overall financial picture. Consider them “expenses in waiting” — potential costs that you should be prepared to face.
Deductibles and Premiums
A deductible is the amount a policyholder must pay out of pocket before the insurance company pays the covered amount on a claim (up to the policy limits). Choosing a higher deductible typically reduces the premium.
For example, increasing the deductible from $200 to $500 on your automobile insurance collision and comprehensive coverage might reduce premium costs by 15% to 30%; selecting a $1,000 deductible could save 40% or more. Raising your homeowners insurance deductible from $500 to $1,000 could save as much as 25% on the annual cost.1
Regardless of whether you already carry a high deductible or raise it to reduce premiums, consider maintaining an emergency account or other liquid assets to cover the amount you might owe in the event of an incident such as an accident, theft, or fire.
Though standard homeowners policies offer protection from fire, lightning, theft, wind, and other stated “perils,” natural disasters such as earthquakes and floods are usually excluded. You might need to purchase a policy endorsement or a separate disaster insurance policy.
In states where there is a greater risk of a major catastrophe, larger deductibles based on a percentage of home value may apply; thus, you would need a larger emergency reserve to prepare for potential out-of-pocket expenses. For example, if a property is insured for $200,000 and the policy has a 2% hurricane deductible, then the first $4,000 must be paid by the homeowner.2 Earthquake policies typically have deductibles ranging from 2% to 20% of the home’s replacement value, depending on the region’s perceived level of risk and other factors.3
Auto and homeowners policies offer limited liability protection. Your auto policy might have a bodily injury liability limit of $100,000 per person and $300,000 per accident; and your homeowners policy might have a $100,000, $300,000, or $500,000 limit for an injury that occurs on your property.
If you have substantial assets and/or greater liability exposure — for example, you have a swimming pool or teenage drivers, entertain often, or have workers on your property — you may want to supplement your auto and homeowners policies by purchasing an “umbrella policy.”
For a few hundred dollars a year, an umbrella policy may provide $1 million to $5 million of protection from liability claims (after your home-owners/auto insurance limits have been met) as well as libel, slander, and defamation. By buying your auto, homeowners, and umbrella policies from the same company, you might reduce the total cost by up to 15%.4
When purchasing or reviewing a policy, it’s important to consider the deductibles and limits and compare the rates for each available option. Also ask about any potential discounts. Your insurance agent can address any questions you may have and make coverage recommendations based on your financial situation, needs, and goals.