What should my deductible be for my million dollar home?
By Kurt Thoennessen, CAPI
The answer to this question depends on your tolerance for risk and how much financial incentive you will receive for taking a higher deductible. The intent of this post is to raise awareness for higher deductible options on your home insurance and to discuss some of the reasons a higher deductible makes sense, specifically for owners of million and multi-million dollar homes.
Before we talk about deductibles, I would like to discuss the importance of having an insurance policy in place that is structured properly and will respond to losses when needed. Sometimes we lose sight of the real possibility of experiencing a loss and overlook the need to be prepared for them. As a point of reference, I am including several data points from The Insurance Information Institute that provide insight into the frequency of home insurance claims.
Homeowners Insurance Claims Frequency*
- Homeowners claims related to wind or hail are the most frequent; the costliest are related to fire and lightning.
- About one in 15 insured homes has a claim each year.
- About one in 30 insured homes has a property damage claim related to wind or hail each year.
- About one in 55 insured homes has a property damage claim caused by water damage or freezing each year.
- About one in 215 insured homes has a property damage claim due to theft each year
- About one in 265 insured homes has a property damage claim related to fire and lightning.
- About one in 1,000 homeowners policies has a liability claim related to the cost of lawsuits for bodily injury or property damage that the policyholder or family members cause to others.
*Insurance Information Institute calculations, based on ISO®, a Verisk Analytics® business, data for homeowners insurance claims from 2010-2014
Risk Tolerance/Comfort Level
As you begin to ponder your homeowners deductible, it is helpful to understand the types of losses that you may end up paying for out of pocket. The following examples are of claims under $10,000 that my firm has seen on million dollar homes.
- A basic lightning strike that damages a home's electronics, a pool pump, or other part of the home has incurred a cost of $10,000 or less
- A small water damage claim, either from a burst pipe, appliance leak, or plumbing backup may fall under $10,000
It is important to remember that million dollar homes may have a lower frequency of loss than smaller homes because of the application of risk mitigation technologies, like centrally monitored alarms, automatic water shutoff valves, and backup generators, that help prevent losses from occurring. In addition, it is of equal importance that losses to million dollar homes can be more costly to repair, which will help influence claims to exceed deductibles. It is interesting to note that some home policies will waive the deductible for certain types of losses if a claim exceeds $50,000. This coverage feature is a rare benefit that further demonstrates the value of high deductibles for million dollar homes.
Besides determining your comfort level with higher deductibles, the premium credit you receive is also a crucial factor to consider. Premium reductions vary depending on the home, but the statements below provide a good representation of the premium savings achieved with higher deductibles. These statements were drawn from a survey of over 600 independent agents and brokers from across the United States about their new high net worth clients who were previously insured with mass-market insurance companies.
- Increasing the deductible on a $1 million home from $500 to $2,500 could save $900 per year.
- Increasing the deductible on a $3 million home from $5,000 to $10,000 could save $1,800 per year.
*ACE Private Risk Services White Paper - How High Net Worth Families Overpay to be Underinsured http://www.acegroup.com/us-en/assets/ace_overpaying-to-be-underinsured-white-paper_mar-2013_hub.pdf
I have worked with owners of million dollar homes for over 10 years, and that experience has provided me with the knowledge about which deductibles were optimal for them. The bullet points below provides a general guide, based on my experience, for the suggested deductibles at the different home replacement cost levels.
- For a reconstruction cost between $1,000,000 to $1,500,000, the suggested deductible is $2,500
- For a reconstruction cost between $1,500,000 to $2,500,000 the suggested deductible is $5,000
- For a reconstruction cost between $2,500,000 to $3,500,000 the suggested deductible is $10,000
- For a reconstruction cost between $3,500,000 to $5,000,000 the suggested deductible is $10,000 or $25,000
- For a reconstruction cost between $5,000,000 to $10,000,000 the suggested deductible is $10,000, 25,000, or $50,000
Having a higher deductible on your home insurance will help reduce your insurance expenditure, and move more of the financial burden from a loss at your home back to you. As you continue to work to find the most advantageous deductible for your million dollar home, please feel free to contact me at firstname.lastname@example.org.
Also, check out www.insurescope.com to sign up to receive updates about new insurance platform for owners of high value homes and other valuable assets being launched in early 2017.