“This policy contains a clause which may limit the amount payable.” You’ve probably seen this sentence on the front page of most home insurance policies, but have you wondered what it actually means?
This sentence is a reminder that your policy contains a deductible, which is the amount of any covered loss that you are personally responsible to pay before your insurance picks up the rest. Most claims will be subject to a deductible; the size of the deductible will vary depending upon your insurance provider’s policy, and the decisions that you made when you purchased your coverage.
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How do deductibles work?
Every insurance policy contains a standard deductible, which will apply to all claims that you make. When purchasing a policy, you have an opportunity to choose from several options; these generally range from $500 to $5,000.
For example: if your policy has a $1,000 standard deductible, and you suffer $50,000 of damage in a kitchen fire, you will be responsible to pay the first $1,000. Then, your insurance provider will cover the remaining $49,000. With Square One, because you’re able to choose your own coverage limits and deductibles, the deductible is applied to the coverage limit rather than the loss amount when a claim exceeds the coverage limit.
The different types of deductibles
Depending on the insurance provider that you choose, your policy may also contain several types of deductibles that apply to specific causes of loss. These deductibles help manage claims costs in territories that are at a higher than average risk, which allows insurance providers to keep their premiums competitive.
The most common additional deductibles include:
Applies to claims resulting from vandalism, mysterious disappearance, burglary and theft. This deductible often applies to rental and vacation properties, which are more vulnerable to crime because of the periods when you aren’t around to protect them. It may also apply if you share your home with unrelated persons or participate in home sharing programs, because both circumstances increase the likelihood of crime damage. This deductible usually ranges from $2,500 to $10,000.
Assuming you purchase earthquake insurance, applies to claims resulting from loss or damage caused directly by an earthquake. Most insurance providers will provide you with several options to choose from when purchasing earthquake coverage. Since an earthquake would cause catastrophic losses across an entire region, deductible options usually range from $2,500 to $200,000.
Glass breakage deductible
Applies to claims relating to glass that forms part of your home. You can sometimes eliminate this deductible for a small additional premium.
Inland flood deductible
Assuming your home is eligible for inland flood coverage, applies to claims resulting from an inland flood. This includes sewer backups resulting from inland flood. If this deductible applies, then options usually range from $2,500 to $25,000.
Applies to claims resulting from hail storms. This deductible usually may apply in areas with a higher than normal risk of hail storms. If this deductible applies, then it’s usually $5,000.
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Higher versus lower deductibles
When deciding upon your policy deductibles, you will notice that higher deductibles usually reduce your policy’s annual premium. This is because higher deductibles reduce the likelihood of frequent, small claims. When you choose a higher deductible, you’re showing your insurance provider that you don’t intend to use your policy for small, unnecessary things – in return, your insurance provider can offer you a lower premium, because you are unlikely to create a disproportionately high share of claim costs.
Avoiding frequent small claims is also helpful to you in the long term: making a claim usually eliminates any claims-free discounts that you currently enjoy on your policy, which increases your annual cost of insurance. Frequent claims can also result in future surcharges, or even the loss of your coverage, reducing or even eliminating any benefit received from making small claims. From a financial perspective, it makes more sense to manage your insurance premium by taking advantage of reasonably higher deductibles and by avoiding unnecessary small claims.
Insurance is designed to take care of large losses which can cause significant financial damage to your family. Smart deductible choices can help to keep your insurance premiums as competitive as possible, while preserving your coverage for those critical incidents when you really need it.
Commonly asked questions
What types of insurance have deductibles?
Almost all forms of insurance have deductibles, and in some cases they may have multiple deductibles that apply to different situations. Deductibles are a tool that insurers use to control their costs, and accordingly are featured in most insurance policies.
How are deductibles calculated?
Many insurance providers allow their customers to choose their own deductible amounts. In other cases the insurer may apply a different deductible to certain types of loss. Imposing a higher deductible on high-risk loss types allows insurers to offer coverage in some situations that would otherwise be too risky.
Can I change my home insurance deductible?
Most insurance providers allow customers to change their deductible. Choosing a higher deductible may lower your premiums, while choosing a lower deductible will raise premiums.
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About the expert: Daniel Mirkovic
A co-founder of Square One with 25 years of experience in the insurance industry, Daniel was previously vice president of the insurance and travel divisions at the British Columbia Automobile Association. Daniel has a bachelor of commerce and a Master of Business Administration (MBA) from the Sauder School of Business at the University of British Columbia. He holds a Canadian Accredited Insurance Broker (CAIB) designation and a general insurance license level 3 in BC, Alberta, Saskatchewan, Manitoba and Ontario.
About the expert: Stefan Tirschler
Stefan is responsible for underwriting leadership, market expansion, and product research and development for Square One's operations. Stefan has earned his Fellow Chartered Insurance Professional designation, and maintains a level 2 general insurance license in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. Stefan is also an Education Committee member and CIP/GIE instructor for the Insurance Institute of Canada.