# Insurance Deductible



## Young&Ambitious (Aug 11, 2010)

Hello,

I have an option between a deductible of either $1,000 or $5,000 on house insurance. Although the difference in annual insurance is only about $300, I am thinking of going with the $5k option as any damages less than this amount is likely to be relatively minor and a claim would result in higher premiums. 

What have other CMFers chosen for their deductible and why?


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## MrMatt (Dec 21, 2011)

Young&Ambitious said:


> Hello,
> 
> I have an option between a deductible of either $1,000 or $5,000 on house insurance. Although the difference in annual insurance is only about $300, I am thinking of going with the $5k option as any damages less than this amount is likely to be relatively minor and a claim would result in higher premiums.
> 
> What have other CMFers chosen for their deductible and why?


That's the reason they give you a discount. It matters what your insurance philosophy is, if it's for catastrophies I'd go as high as possible.


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## carverman (Nov 8, 2010)

Young&Ambitious said:


> Hello,
> 
> I have an option between a deductible of either $1,000 or $5,000 on house insurance. Although the difference in annual insurance is only about $300, I am thinking of going with the $5k option as any damages less than this amount is likely to be relatively minor and a claim would result in higher premiums.


I started with mine at $1000 deductible, and with my insurance company, it's a shrinking deductible, depending on how many years that you don't file any claims. 
In my case, it's now down to $800 and with a glass deductible of $50.
So basically each year you are claims free, your deductible should be reduced by 10%.
It all depends on your living accommodations and whether you are a property owner.

Lets face it, these days you have to be "self insured" for minor claims. If you live in a high break-in area, you could spend the $30 a month (saved) on the higher deductible for a monitored alarm system. or take a chance.

Here's something you have to think about:
In a total fire, with so much smoke and water damage, replacing any part of the house substructure and windows is going to be very expensive..tens of thousands in some cases.
I wouldn't be able to afford that anymore on a restricted income. At least, in my case, if a catastrophic even occurs, the most I would be out of pocket this year is $800..
basically a months pension. If I raised the deductible to $5000, to save some premium..and a catastrophic fire occurs, I could spend just $5000 on my guitars and computer ,
and that would be out of my savings.
Lets say you have a serious fire and it requires several thousand ($50K) to repair and clean the interior and replace all the broken glass caused by the firefighters etc.
$50,000 claim MINUS THE $5000 DEDUCTIBLE...($45K) is paid by the insurance company, the rest because of the deductible, you pay out of pocket.
So you have to ask yourself... Is it still worth it to save $300?

So in my case..why should I pay insurance premiums?... and have to carry some of the cost of replacing my furniture/personal effects to
save a few dollars in premium?

I have no intentions of filing any claim under $1000 in any case, since that could raise the premium, I suppose, in subsequent years, but my insurance company increases the premium each year in any case, because I have a guaranteed replacement cost and they have to increase the rebuild cost of the building each year. 

In 2012 the rebuild cost was $246K, in 2013, it's $258K, so the premium increase has something to do with that along with any inflationary increases that the insurance company sets.


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## MoneyGal (Apr 24, 2009)

The high deductible approach works if you set up your own reserve fund. TRM (haven't seen him around here lately!) would call this one of 8 million tiers of saving. It doesn't work if you don't set aside the "saved" premiums.


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## carverman (Nov 8, 2010)

MoneyGal said:


> The high deductible approach works if you set up your own reserve fund. TRM (haven't seen him around here lately!) would call this one of 8 million tiers of saving. It doesn't work if you don't set aside the "saved" premiums.


Exactly. The way I see it, and I'm being practical , and not necessarily frugal here. ..with this *deductible game, you are making a bet with the insurance company that in exchange for a lower premium,*
you take a chance on any losses that exceed the deductible as well. 

If there is a robbery. or fire, and you calculate that your flat screen. laptops, electronics are stolen and those cost you say $5500 when new, they will apply depreciation on those items first then the applicable deductible, so in the end..if you opted for that $5000 deductible to save $300...

1. you get nothing from the insurance company for your loss of $5,000
2. You have to spend another$5000 to replace those items stolen/destroyed in a fire
3. They now can raise your premiums next year, because you have reported a loss and made a claim
4. You are still paying homeowners (or renters) insurance

So who's the ultimate winner in this "crap shoot"?


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## CanadianCapitalist (Mar 31, 2009)

carverman said:


> If there is a robbery. or fire, and you calculate that your flat screen. laptops, electronics are stolen and those cost you say $5500 when new, they will apply depreciation on those items first then the applicable deductible, so in the end..if you opted for that $5000 deductible to save $300...


If your coverage is for replacement value, then the insurance payout will reflect what it will cost you to replace the lost items.


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## carverman (Nov 8, 2010)

CanadianCapitalist said:


> If your coverage is for replacement value, then the insurance payout will reflect what it will cost you to replace the lost items.


Yes, that is true, if you go for that option. The other option is a (depreciated) cash value. If your flat screen is 5 years old, they will apply 5 years of depreciation and give you a check for the difference.
http://home.howstuffworks.com/real-estate/how-does-replacement-cost-relate-to-actual-cash-value.htm

I was replying to the OP on whether it's worth to save $300 a year by electing a $5000 deductible. That would be a $300 saving in premium for a difference of $4000 on his deductible.
This is ok in a win-win situation, where he saves the $300 on the premium and the insurance company doesn't have to pay out for lets say 10 years as an example.
His premium savings in 10 years = $3000, as long as he puts that $300 into a "fire insurance savings acct" and doesn't touch it for 10 years.

If he did have a claim after 10 years, he would only be out $2000 out of pocket, if he has to cover any major theft or fire damage. But it depends on his luck.


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## Young&Ambitious (Aug 11, 2010)

I have savings, investments etc available, my personalized version of TRM's tiers. While I haven't been as active lately I haven't seen alot of regulars on here lately! 

At this point am leaning towards the higher deductible as a) what is the likelihood of a major event happeneing and b) if it is minor, it would not be worthwhile to make a claim...

Thanks for helping me think this one out guys, appreciate the feedback.


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## Young&Ambitious (Aug 11, 2010)

And because I am a nerd, I now have some quantitative statistical data 

Article 1 http://www.jfordfinancial.com/newsletter/what-are-the-odds- (it's brief!)


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## MrMatt (Dec 21, 2011)

carverman said:


> Exactly. The way I see it, and I'm being practical , and not necessarily frugal here. ..with this *deductible game, you are making a bet with the insurance company that in exchange for a lower premium,*
> you take a chance on any losses that exceed the deductible as well.
> 
> So who's the ultimate winner in this "crap shoot"?


Premiums are simple
Premium = Expected cost + Admin + Profit.

The insurance company is better at predicting expected cost than you are.
You're statistically ahead NOT getting insurance.
They're the winner in that case.

However for worst case planning, insurance improves your situation dramatically.
Which is actually a win for you.

Insurance can therefore be a win-win game.

The biggest problems is many people think that the profit is getting too big.
While fraud can unfairly increase the expected cost and admin charges.


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## carverman (Nov 8, 2010)

MrMatt said:


> However for worst case planning, insurance improves your situation dramatically.
> Which is actually a win for you.


Insurance is a direct financial loss each year to you..the individual..unless you have a MAJOR fire claim, where your house is completely or partially destroyed
Unless, you have won the 649 lottery recently, you are really taking a chance being "self insured-no insurance", because chances are you are not going to have
the savings or financial resources to rebuild afterwards. No bank will advance you any money for rebuilding, unless you have some money in the bank to cover
at least part of the rebuild loan..so insurance is the only way to go. The insurance company spreads it's risk of claims being reported by using many factors
to determine the premium. They collect all the premiums, invest a portion for the risk fund and use the rest as profit to pay staff etc. 

Profit (for insurers) or any other business, is something the consumer can't control, you only have to look after your own interests.


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## MoneyGal (Apr 24, 2009)

Young&Ambitious said:


> And because I am a nerd, I now have some quantitative statistical data
> 
> Article 1 http://www.jfordfinancial.com/newsletter/what-are-the-odds- (it's brief!)


Fun fact: I sourced the data in the presentation from which that article was taken. For this book: http://www.qwema.ca/index.php/qwema-books/542-2/

I note that the article didn't include the amazing stats on the chance of the asteroid Apophis hitting Earth, which we also included.


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## carverman (Nov 8, 2010)

Young&Ambitious said:


> *what is the likelihood of a major event happening *


Your call of course. :biggrin:

Major claims that could arise over the course of time:

*Caused by nature:*
*Roof damage from windstorm, hurricane, tornado
Ice damage on roof
grass fires
flood plain (rivers overflowing)
* torrential rains..sewers overflowing

*Caused by faults:*
 *wiring
plumbing pipes bursting
defective heating systems
* fireplaces
gas furnace leak-defective

Caused by others:
* fire in the house next to you... causes embers to ignite your roof
smoke damage from a nearby fire
explosion of house nearby due to gas leak
something left on stove top igniting
* major theft

liability lawsuit:
somebody trips on icy path/steps, breaks a leg and decides to sue you for lost wages, pain and suffering etc


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## carverman (Nov 8, 2010)

MoneyGal said:


> Fun fact: I sourced the data in the presentation from which that article was taken. For this book: http://www.qwema.ca/index.php/qwema-books/542-2/
> 
> I note that the article didn't include the amazing stats on the chance of the asteroid Apophis hitting Earth, which we also included.


Gee M.G...thanks for the "informed statistics" on how long one can expect to live based on current age and probability.... even if you appear to be in good health (or think you are)..lots of things
can happen "out of the blue"
but this one truly worries me:biggrin: " Multiplication: Prepare for many alternative and unexpected universes"
Isn't that another way of saying, "probablity and distribution" of something catastrophic happening to you in your expected lifetime?

more likely
- car accident..driving along and somebody runs a red light and t-bones you
- gunshot wounds
- hit by a bus/truck crossing the road
- catching some disease that leads to death
- catching some disease while in a hospital to recover from another disease
- heart attack


less likely
- tsunami
- earthquake

and even less likely:
hit by a meteor
hit by space junk
hit by an asteroid
earth swallowed by a black hole


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## MoneyGal (Apr 24, 2009)

C-man: that's kind of the whole point of the book. There are a range of alternate outcomes for you - which ones should you be worried about, and how much should you be worried about them?


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## Young&Ambitious (Aug 11, 2010)

Very cool MoneyGal! 

Once I am done doing some reno's and school I need to get back to my reading list, which now incudes that book!


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## fraser (May 15, 2010)

I think the deducatable is really just an idicator of your threshold of financial pain-based on your personal financial situation.

We increased our home policy, and then increased the deductable to 1K in order to keep the price constant. We would not bother with a small claim.

We recently bought out of country medical insurance for six months. We went with a $2K deductable because it decreased the combined premium for both of us from $1150 to $750. We only needed insurance for a catastrophic event. We would have gone to 5K or 10K decuctable but the premium savings with our particular insurer were negligable after 2K deductable.

Only you can tell how much risk you are prepared to take on. Risk varies inversly with price. You decide!


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## MrMatt (Dec 21, 2011)

carverman said:


> Insurance is a direct financial loss each year to you..the individual..unless you have a MAJOR fire claim, where your house is completely or partially destroyed
> Unless, you have won the 649 lottery recently, you are really taking a chance being "self insured-no insurance", because chances are you are not going to have
> the savings or financial resources to rebuild afterwards. No bank will advance you any money for rebuilding, unless you have some money in the bank to cover
> at least part of the rebuild loan..so insurance is the only way to go. The insurance company spreads it's risk of claims being reported by using many factors
> ...


What I was trying to explain is how it is a direct loss for you every year, and statistically it is, and it pretty much must be.

As far as being self-insured, for small claims I am, for large claims I rely on external insurance.
That's the way we all are, whether we notice it or not. 
Typically the largest insurance I see people fore go is that on an older car, if it gets stolen/trashed the payout is so low, it's not worth it. 

For many that's not an option, but for some it is. I'd admit the people who can afford such a strategy for home insurance is likely quite slim.

FWIW I'm not suggesting they don't have liability, just collision/comprehensive.


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## Ponderling (Mar 1, 2013)

My wife works as a auto claims processor of an insurance company. 

She gets the impression a lot of people give absolutly no thought to the dollar value of the deductible when they are buying the product. 

A lot of ther callers have a hard time even understanding what a deductible is. 

After 6 years at the job, I now only get snippets of the most outragous calls relayed to me at the dinner tabel when we catch up on our days.


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