As elementary school children, we were first introduced to the concept of ratios, or how one number relates to another number. Back then we tended to think that like almost everything else we were learning, ratios were just one more forgettable piece of information we would never use. Of course, we were wrong. Ratios are something we constantly come in to contact with, even when it comes to our homeowner’s insurance.
The ratio between the policy’s deductible and the premium is very real. When the deductible increases, the premium decreases. With a higher deductible the carrier is transferring more of the risk to you. Yet, four out of ten Americans carrying homeowner’s insurance do not understand that simple ratio and its consequences.
The Insurance Research Council (IRC) recently conducted a study that indicated only 37 percent of homeowners and 48 percent of renters, who have homeowner’s insurance, knew their policy had a deductible. These same respondents also answered incorrectly when asked how a deductible increase affects a premium. They responded that the premium either increased, stayed the same, or they did not know.
The data for the IRC’s report, Public Attitude Monitor 2005, Issue 2, came from a survey conducted by TNS NFO, a market research company. The survey was designed as a self-administered checklist mailed on January 1, 2005, to selected households in the U.S. There were more than 55,000 respondents ages 18 or older who answered six questions about homeowner’s insurance.
Many Americans may overlook the easiest way to reduce insurance costs simply because they do not understand the relationship between their policy’s deductible and the premium. The Insurance Information Institute, in their publication entitled, 12 Ways To Lower Your Homeowner’s Insurance Costs, has this to say about the relationship between the two:
“Deductibles are the amount of money you have to pay toward a loss before your insurance company starts to pay a claim, according to the terms of your policy. The higher your deductible, the more money you can save on your premiums. Nowadays, most insurance companies recommend a deductible of at least $500. If you can afford to raise your deductible to $1,000, you may save as much as 25 percent. Remember, if you live in a disaster-prone area, your insurance policy may have a separate deductible for certain kinds of damage. If you live near the coast in the East, you may have a separate windstorm deductible; if you live in a state vulnerable to hail storms, you may have a separate deductible for hail; and if you live in an earthquake-prone area, your earthquake policy has a deductible.”
The next time you review your homeowner’s coverage, be sure to talk with your agent about how increasing your deductible will impact your premium. It may surprise you just how much you can save.