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As with most types of insurance, you can lower the monthly premium on your homeowner’s policy by raising your deductible. But whether it makes sense to do so can vary by state, a new report finds.
The deductible is the amount of a loss you must cover out of pocket. Deductibles for homeowners’ policies typically range from $500 to $1,000, but may be as low as $250 or as high as $5,000. The average annual premium, meanwhile, was $1,034 in 2012, the latest data available, according to the National Association of Insurance Commissioners.
An analysis done for insuranceQuotes.com, an online insurance site, found that raising a homeowner’s insurance deductible to $2,000 from $500 lowers the average annual premium by 16 percent nationally.
The potential savings, however, are much larger in some states, the study found. In North Carolina, for instance, a similar increase in the deductible saves homeowners 41 percent, while homeowners in Rhode Island, Florida, Connecticut, Pennsylvania and Massachusetts would save 20 percent or more.
In states like Indiana and Texas, however, the savings is just 6 percent — probably not enough to justify the extra financial risk that comes with a higher out-of-pocket exposure.
The reasons behind state variations are complex but are due, in part, to differences in state laws, since insurance is regulated by the states, said Laura Adams, senior analyst with insuranceQuotes.com.
For the analysis, insuranceQuotes commissioned Quadrant Information Systems, a provider of data and pricing analysis for the insurance industry, to examine policies from the largest carriers (representing 60 to 70 percent of market share) in the 50 states and the District of Columbia. The study is based on premiums for a two-story, single-family home insured for $140,000.
The catch of a much higher deductible, of course, is that you risk not having enough cash on hand to cover the deductible if you need it, Ms. Adams said. Many Americans lack significant savings, so paying several thousand dollars to cover a major loss may be a stretch. Homeowners with a robust emergency fund can afford to raise their deductible, she said, but “if you’re living paycheck to paycheck, or if you’re not a consistent saver, be careful.”
Plus, if you raise your deductible significantly, that means you’ll be responsible for more minor damage. “You’ll be self-insuring for smaller losses,” said Jeanne Salvatore, a spokeswoman for the Insurance Information Institute, an industry group.
Here are some additional questions about homeowner’s deductibles:
■ Are all homeowners’ deductibles based on a flat dollar amount?
No. Some special disaster deductibles are based on a percentage of the insured value of the property. These include hurricane deductibles, which apply in 19 coastal states (Alabama, Connecticut, Delaware, Florida, Georgia, Hawaii, Louisiana, Maine, Maryland, Massachusetts, Mississippi, New Jersey, New York, North Carolina, Pennsylvania, Rhode Island, South Carolina, Texas and Virginia) and the District of Columbia.
Hurricane deductibles range from 1 to 5 percent or more of the insured value, but 2 percent is common, Ms. Salvatore said. Such deductibles generally apply only when damage results from a hurricane or a tropical storm. Some policies set different triggers for applying the special deductibles, like a strong Category 2 or 3 hurricane.
■ Are there other ways to save on homeowners’ premiums?
Many insurers offer discounts if you buy multiple policies, like homeowners’ and automobile coverage, or if you take steps to reduce risk, like installing security or sprinkler systems. Others may offer a discount if you have your premium automatically deducted from your bank account. So you should check with your insurance agent. Also, according to the Insurance Information Institute, If you’re at least 55 years old and retired, you may qualify for a discount of up to 10 percent from some insurers (the rationale being that you’re probably at home more, so you may spot potential problems more quickly). It may also make sense to shop around every few years, to see if you’re still getting the best rates.
■ Does the age of my house affect my homeowner’s premium?
Older homes may be more costly to insure than newer ones, particularly if they have electrical and plumbing systems that haven’t been updated.