Author Topic: Increase home insurance deductible - does it make sense in the short-term?  (Read 1954 times)

NeonPegasus

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Long story short, we will be selling our current house and moving in with my father-in-law in 14 months.

My home insurance is up for renewal. I have a $1500 deductible. I was thinking of raising it to $7500, which would save me about 40% (cost drops from $1137 to $688). I was about to tell my agent to go ahead and raise by deductible but I'm wondering if I'm looking at this wrong.

If I raised the deductible by $6k, I'd save enough in premiums to make up for the larger deductible in about 13 years. Considering we've never filed a claim in the 15 years we've lived here, that's a reasonable payback time.

That being said, does the evaluation change considering I know I'm moving in 14 months (and then will have no mortgage or home insurance). The potential upside is saving $449. The potential downside is that if I do have to make a claim in the next 14 months, I would have to pay an extra $6k out of pocket.

So, how do you look at the math on this? Do you go with the lower risk/higher cost due to the short time frame and low barriers to filing a claim (i.e. who cares if I get "dinged" for using the insurance as I won't be paying for it going forward and even one claim won't be a big deal)? Or do you risk having to pay an extra $6k in an unlikely event (though hail damage isn't that unlikely around here - people get new roofs from insurance companies all the time) so you can pocket a guaranteed $449?

Tiger Stache

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so over the next 12 months you'll save $449 but may have to pay $6000 if something happens? how is this something you're entertaining?

$449 vs $6000, that's the math.

why not wait till next year to make the gamble for two months and you'll be closer to actually moving? things may change over the next 12 anyway if you're not planning to move for 14 months.

slugline

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First thing -- it's not quite the full $6000 you're risking because you're putting $449 back into your pocket right off the bat. So what you're worried about is $5551.

Do you have an emergency stash that can be tapped in this kind of situation? That's what mine's for. If I had to shell out five grand for house damage it would be annoying but not heartbreaking. That's probably the yardstick to go by here. Also, you've lived there for 13 years and have probably noticed the bad things that have happened in your neighborhood, so you've probably got a decent grasp of the odds here.

NeonPegasus

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Thanks for the thoughts.

After thinking it over, I feel most comfortable sticking with the lower deductible. While I have plenty of money to cover a higher deductible, I'd be kicking myself if this was finally the year a hailstorm got us. It seriously happens all. the. time. around here. FIL (lives 15 mi away) had to replace his roof last year. My parents (30 mi away) had to replace theirs a few years prior. There's just not a long enough timeframe to spread out the risk.

Goldielocks

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I chose a $5k deductible after realizing that I never claimed the nearly $2000 losses (twice now) when my deductible was $1k, for fear of rate increases.  I realized that I don't use / need insurance to cover me for losing $2k, it is the whole loss of home thing that has me scared.

Prairie Stash

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so over the next 12 months you'll save $449 but may have to pay $6000 if something happens? how is this something you're entertaining?

$449 vs $6000, that's the math.

why not wait till next year to make the gamble for two months and you'll be closer to actually moving? things may change over the next 12 anyway if you're not planning to move for 14 months.
By that logic, maybe this year I'll need it, you should always have the low deduction. The two months will be prorated and carry the same risk as the previous 12 months. In telling them to keep it and get rid of it that's contradicting advice. Its either always a good idea or never, that's how insurance is designed, picking/choosing which months to have it is market timing.

I went high deductible because I could afford to pay the high deductible (that's the first criteria you have to meet). Each year I reevaluate and come to the same conclusion. $449/$6000 is an 7.5% return for the risk you take. Any day I can get a 7.5% return on my money I take it.

Of course in the 40 years my house has existed, not just the time I've owned it, its never used hail insurance. Also my roof could be shingled for $3000 and I wouldn't claim a $1500 deductible anyhow. If its a major hail event then damages would exceed $15k to redo the sidings, my house value would increase to offset the replacements (new siding, new windows, new roof). Either way I come out fine.

NeonPegasus

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so over the next 12 months you'll save $449 but may have to pay $6000 if something happens? how is this something you're entertaining?

$449 vs $6000, that's the math.

why not wait till next year to make the gamble for two months and you'll be closer to actually moving? things may change over the next 12 anyway if you're not planning to move for 14 months.
By that logic, maybe this year I'll need it, you should always have the low deduction. The two months will be prorated and carry the same risk as the previous 12 months. In telling them to keep it and get rid of it that's contradicting advice. Its either always a good idea or never, that's how insurance is designed, picking/choosing which months to have it is market timing.

I went high deductible because I could afford to pay the high deductible (that's the first criteria you have to meet). Each year I reevaluate and come to the same conclusion. $449/$6000 is an 7.5% return for the risk you take. Any day I can get a 7.5% return on my money I take it.

Of course in the 40 years my house has existed, not just the time I've owned it, its never used hail insurance. Also my roof could be shingled for $3000 and I wouldn't claim a $1500 deductible anyhow. If its a major hail event then damages would exceed $15k to redo the sidings, my house value would increase to offset the replacements (new siding, new windows, new roof). Either way I come out fine.

But would your risk/return evaluation change if you knew you wouldn't recoup any savings from lower premiums in years to come? I'm looking at it as the difference between long-term versus short-term investments.

Our roof cost $7k 10 years ago. It's not so old that a replacement would add a bunch of value.

Prairie Stash

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With insurance its a series of short term events. Every single year you should evaluate it and decide accordingly whether its worth it. Having, or not having, insurance this year has no effect on next year. Barring seasonal weather (hail happens in the summer, not winter here), there isn't much difference on a daily basis.

Gambling 2 months is a smaller gamble than 12 months, but the risk/reward is the same on a daily basis, unless you point out which 2 months will have the increased premium and then correlate the risk of weather damage for those 2 months. Then it stops being a hypothetical and you can put forward a reason why the risk would be different. For example in January/February where I live there has never been hail, hurricanes, tornados, lightning, wildfires, ice dams (they occur in march/april) or other events. On the flip side pipes tend to freeze if the furnace goes out for more than 2 days, extremely unlikely, so my major risks are down for those 2 months. 

If you were to do this long term I would still do it for a single year now then resume when you have a new house. Interrupting it for a year before resuming the high deductible isn't any different than doing it continuously. There's also the caveat; you always need insurance when you can't afford the loss, I don't know if you can/can't pay the high deductible without it being a major problem or a minor inconvenience. When I first owned my home a $6000 deductible would have been huge, now it could be paid easily. Same person and same house but different points in my life.

sisto

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I chose a $5k deductible after realizing that I never claimed the nearly $2000 losses (twice now) when my deductible was $1k, for fear of rate increases.  I realized that I don't use / need insurance to cover me for losing $2k, it is the whole loss of home thing that has me scared.
This is exactly what I did. I read something on MMM about cutting rates etc. I had heard stories of people getting their rates raised badly after a claim and decided I would only ever claim if it was something around $5K or higher. So I found that I could cut my costs of insurance in half by raising the deductible from $1K to $5K so I did it.