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What Insurance Deductible Should I Carry?

I am often asked, “What deductible should I carry?” The answer is never one size fits all. It usually depends on your circumstances, financial situation, and tolerance for risk. 

First, it's important to understand what a deductible is. A deductible is what you must pay out of your own pocket before the insurance company pays. For example, if your home has a 1,000 deductible, and a fire causes $15,000 in damage, you would pay the first $1,000, and then the insurance company would pay the remaining $14,000. 

Auto insurance has two types of deductibles: comprehensive and collision. Your collision deductible applies for damage to your car when it is involved in a collision with something else (usually another vehicle). Your comprehensive deductible applies for damage to your car caused by other covered perils, such as hail, vandalism, or theft. Auto insurance deductibles are generally $500 or $1,000. The higher the deductible, the more you share in the risk, and so the lower your premiums will be. 

Home insurance deductibles work the same way. Generally home insurance deductibles are $500, $1,000, or $2,500. Some insurance companies offer $5,000 and $10,000 as well. In Florida, we have a separate windstorm deductible, which is in the form a percentage. The most common windstorm deductibles are 2%, 5%, and 10%. Percentage deductibles are a function of the insurance coverage amount of your home. For example, if your home is insured for $200,000, and your windstorm deductible is 2%, then your deductible would be $4,000 (2% of 200,000).

So which deductible should you choose? Again, it depends on your circumstances, financial situation, and tolerance for risk.

Circumstances: If you are in a situation where, for whatever reason, you feel you may be at higher risk for a claim, go with the lower deductible. Examples could include having an inexperienced driver on your policy or living on the coast where you may be more likely to have windstorm damage.

Financial Situation: Never opt for a deductible so high that you cannot afford to pay it. If you have a $10,000 deductible but only have $2,000 in your emergency fund, you will be in trouble. Many people choose the highest deductible available to keep costs low, but if you do not have that amount on hand, you will have a financial problem in addition to a claim.

Tolerance for Risk: After assessing your individual circumstances and assuming you have the money set a side for various deductible options, the question then becomes, "What is your tolerance for risk?" If you are more conservative and do not like larger financial "surprises" in your life, go with the smaller deductible. If you can tolerate paying a higher deductible after a claim (an already stressful situation) go with the higher deductible and use the premium savings for something more exciting than insurance!

As you can see, there is not a one size fits all answer to this question. It is ultimately something only you can answer after assessing your individual situation (and with the help of an agent who can provide you with different options). Hopefully following these tips will help you decide!