Since premiums and deductibles both mean money leaving your bank account, it’s important to understand how each one works.
“Premium” is just a fancy way of saying “cost” or “payment amount” in the insurance industry. It’s the amount you must pay for the coverage you’re purchasing. Premiums are often collected monthly, but some companies and products allow for annual premium payments as well.
Homeowners insurance premiums are impacted by several factors which generally include the following:
- Home value: Higher value homes cost more to replace and therefore cost more to insure.
- Location: In some cases, the location of a home can reduce the cost to insure it. For example, homes situated near a fire station or fire hydrant might have lower premiums.
- Claims history: Your specific claims history can impact your premium, with more frequent claims resulting in higher rates.
- Home age: Older homes often aren’t up to current building code standards. That means they could experience a greater likelihood of claims than a newer home. The result could be higher homeowners insurance premiums for an older home versus a comparable new one.
- Home security systems and fire detection equipment: Homes that are monitored for fires or break-ins generally qualify for reduced premiums.
- Presence of “attractive nuisances”: Homes with swimming pools or other features like trampolines or play structures can lead to more injury claims and as such are generally charged higher insurance premiums. Some insurers may also require homeowners to take precautions to minimize risks such as installing a fence around a swimming pool.
- Coverage amounts: Selecting coverage at the higher end of the available ranges costs more than lower coverage amounts.
- Credit reputation: In states where it’s permitted, your credit history can be used as a factor to determine homeowners insurance premiums, with lower credit scores resulting in higher premiums.
A deductible is the amount you’re required to pay as part of a claim. For example, if a covered windstorm causes $10,000 worth of your damage to your home, and your deductible is $2,000, your insurance will pay $8,000 toward the repairs and you’ll pay $2,000.
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You get to pick the amount of your deductibles from options offered by your insurer. Choosing a higher deductible generally lowers the cost of your insurance premium, while choosing a lower deductible generally increases it.
Tip from Scott H., CFP®
If you decide to go with a higher deductible, make sure you have the money available to pay that deductible if you ever need to file a claim.