The smartest homeowner's insurance move: a $100,000 deductible

Forbes
The smartest homeowner's insurance move: a $100,000 deductible
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You can save hundreds of dollars a year on homeowner's insurance by raising your deductible. (Photo credit: …

Did you know you can shave hundreds of dollars off your annual homeowner's insurance bill by increasing your deductible? We don't just mean going from $500 to $1,000. Think big. $2,500. Already have a $2,500 deductible? Then think bigger. $5,000. $10,000. Or really big. Like $100,000.

"We have clients with deductibles of $100,000 fairly routinely on $5 million homes," says Mary Boyd, senior vice president and chief operating officer for ACE Private Risk Services. Some ACE clients with multiple homes and a "significant" net worth have deductibles in the millions of dollars, she says. What do they know that you don't?

When you choose a deductible, you're picking a number you're willing to spend out of pocket if you suffer a loss. It should certainly cover what you think of as run-of-the-mill outlays (when calling the insurer would be more of a hassle than writing a check to the repairman). But if you're comfortable with laying out even more at the time of a loss, over time you can really save money on premiums.

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Choosing a low deductible is "a characteristic mistake," says Jack M. Guttentag, a professor emeritus at the Wharton School of the University of Pennsylvania who runs MortgageProfessor.com. "What you want is coverage for the risks that you can't pay for yourself," he says. (A pine tree bisects your living room; a major electrical fire takes out your gourmet kitchen.) Pick the number you're willing to spend out of pocket based on your resources -- how much income you have coming in and how much money you have in the bank.

How much might you save with a bigger deductible? On a house insured for $1 million with a $2,500 deductible, a homeowner could save $1,000 a year by going to a $10,000 deductible at ACE (the premium and savings will vary depending on the house's location and other factors). Since the homes ACE insures typically suffer a loss about once every 20 years, this is a very good bet, says Boyd.

Ted Mitchell, a senior public relations specialist with MetLife Auto & Home says MetLife has seen a trend toward consumers choosing higher deductibles in recent years. While a typical homeowner's insurance policy deductible is $500 or $1,000, MetLife offers flat dollar deductibles of up to $10,000 (except in Texas which has percentage deductibles). But you don't have to go to the max for the savings to kick in. In one example, on a coastal Virginia house insured by MetLife for $1 million with a $1,000 deductible, a homeowner could save $300 a year by going to a $2,500 deductible or $600 a year by going to a $5,000 deductible.

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To help minimize the chance (and severity) of a loss and your out-of-pocket tab for a high deductible, Boyd says homeowners should install the usual burglar and fire alarms but also consider installing more high-tech safety measures such as automatic leak detectors, battery backup systems for sump pumps, and lightning protection systems. You get additional credits on your premium for these efforts.

Your agent might use the savings opportunity to sell you other insurance, and that can make sense and still put you ahead of where you were before making the deductible changes. What if you have expensive jewelry? The ACE homeowner's policy covers up to $10,000 in jewelry with a maximum of $5,000 for a single item -- subject to your deductible. That means if you chose a $10,000 deductible and lost a bracelet and earrings worth $10,000, there would be no reimbursement. So you might want to consider insuring jewelry (and fine arts or other collectibles) under a valuables policy as an add-on to your homeowner's policy. With a valuable policy, no deductible applies in the event of a loss.

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