How to choose the right deductible

The deductible is the part of a covered loss the policyholder pays before the carrier pays anything. It appears on the declarations page beside the coverage it applies to, and every one of them is a choice the policyholder made, or a default they never questioned. Raising it lowers the premium, because the carrier is no longer pricing the small, frequent losses that make up much of the claims count; lowering it raises the premium for the opposite reason. The right level is the one where the annual saving justifies the extra money at risk, given what the household can actually pay on a bad day.

That is a calculation, and it can be done in a few minutes with the renewal offer in hand. This guide sets out the method, then the wrinkles that make home deductibles different from auto deductibles, the percentage deductibles common in the four states for wind, hail and earthquake, and the situations where the deductible should not move at all.

What to gather

The decision needs three numbers you have and one you must ask for.

• The current declarations page, with each deductible listed against its coverage: collision, comprehensive, glass, the home's all-perils deductible, and any separate wind, hail or earthquake deductible.
• The premium for each of those coverages at the current deductible. The declarations page breaks the auto premium out by coverage; the home premium is usually a single figure.
• Quotes from the carrier for the same coverage at two or three alternative deductibles, higher and lower. Carriers provide these on request; the difference in premium is the number the whole decision turns on.
• An honest figure for the cash the household could put toward a loss tomorrow without borrowing. Not what it could raise in a month; what is in the account.
• The claims history for the past several years, to see how often the deductible actually gets used.

Step one: work out the break-even

Take the premium saving from moving to the higher deductible and divide the extra deductible by it. The result is the number of claim-free years it takes for the saving to pay for one use of the higher deductible. If the saving is small and the extra deductible large, the break-even is many years and the higher deductible is a poor trade. If the saving is large relative to the extra deductible, it pays for itself quickly and the higher deductible is the better choice for anyone who can fund it.

Then run the arithmetic the other way for a lower deductible: the extra premium each year is the price of being paid an extra slice on a claim that may never come. A lower deductible is a purchase of small-claim coverage at a price that is usually high relative to what it returns, because carriers price frequent small losses to include their handling cost. The comparison exposes that price and lets you decide whether it is worth paying.

The break-even is a rate of return on money kept in your own account rather than the carrier's. The higher deductible tends to win on auto collision and comprehensive, where the saving is a meaningful share of a smallish premium, and the case is less clear on a home policy, where the saving per step is smaller in proportion.

Step two: test it against the cash you have

The arithmetic only holds if the deductible can be paid when the loss happens. A deductible you would have to put on a credit card at interest, or that would come out of the rent, is not a saving; it is a loan taken on the worst day. The test is simple: could the household write the cheque for the deductible this week and still meet its obligations. If yes, the higher deductible is available. If not, the ceiling is whatever amount passes that test, whatever the break-even says.

Remember that deductibles stack across a bad event. A hailstorm can dent two cars and the roof in one afternoon, and each policy's deductible applies separately: two comprehensive deductibles and a home deductible in the same month. A household that raised every deductible to the same high figure should be able to fund all three at once. This is why the emergency fund and the deductibles are the same conversation.

Step three: auto deductibles, one coverage at a time

Collision and comprehensive carry separate deductibles and can be set differently. Collision claims are more often the driver's fault, are rated at renewal, and are the ones a household most often chooses not to file; a higher collision deductible aligns the policy with that reality. Comprehensive claims, for theft, hail, glass and animal strikes, are not the driver's fault and are rated more lightly by most carriers, so people file them more readily; a somewhat lower comprehensive deductible can make sense where hail is a real risk, as it is along the Front Range side of Utah and Idaho and in the Arizona monsoon.

Glass deserves its own look. Many carriers offer full glass coverage with no deductible, or a low separate glass deductible, as an endorsement. In the desert states windshields are a frequent loss from gravel on highways and from dust storms, and a household that has replaced two windshields in five years should look at what the endorsement costs against what it has paid.

The value of the car sets an upper bound. A deductible that is a large fraction of the car's value on an old car means collision coverage is paying little for its premium; on such a car the honest choice is often to drop collision and comprehensive and carry the risk yourself. A car with a loan is the exception, because the lender requires physical damage coverage and often caps the deductible it will accept. Leases cap it too.

Step four: home deductibles and percentage deductibles

A home policy usually has one deductible for all perils and, in many parts of Arizona, Nevada, Utah and Idaho, a separate deductible for wind and hail expressed as a percentage of the dwelling limit rather than a flat figure. A percentage deductible grows with the dwelling limit, so the household that raised its dwelling coverage to keep up with construction costs also raised its wind and hail deductible without a decision being made. Read the declarations page to see which perils have their own deductible and work out the actual dollar amount at the current dwelling limit; then decide whether the flat all-perils deductible should be set higher or lower in light of it.

Earthquake coverage, where it is bought, in Utah's Wasatch Front and parts of Idaho and Nevada, nearly always carries a percentage deductible, and a large one. It is priced for the catastrophic loss, not the cracked chimney, and it is the clearest example of a deductible that should be judged against what it would cost to rebuild rather than against the premium saving. A home deductible is also used far less often than an auto deductible, because home claims are rarer than auto claims for the same household, which lengthens the break-even for a lower deductible and strengthens the case for a higher one. Mortgage lenders sometimes set a maximum deductible they will accept, so confirm before moving it.

When to leave the deductible alone

Not every renewal is the moment to change it. These are the cases where doing nothing is the recommendation.

• The premium saving from the next step up is small in proportion to the extra deductible; the break-even is long and the trade is not worth the risk.
• The household's cash reserve would not cover the deductibles on two policies at once.
• A lender or lessor caps the deductible, and the current figure is at the cap.
• A claim is likely in the near term: an ageing roof, a teenager about to be licensed. Raising the deductible just before a probable loss is choosing to pay more of it.
• The policy carries a disappearing or vanishing deductible feature that has been building for claim-free years; changing the deductible can reset it.
• The deductible was recently raised and the saving has not yet been banked. Give the arithmetic time to work before moving it again.

Common mistakes

The errors here are almost all about mismatching the deductible with the household's real position.

• Raising the deductible to lower the premium and then filing a claim just above the new deductible, which is rated at renewal and returns very little.
• Setting the same deductible on every policy without noticing that they would all apply in the same storm.
• Assuming the home deductible is a flat figure when the declarations page shows a percentage for wind and hail.
• Keeping collision on a car worth little more than the deductible.
• Forgetting the lender's cap and finding out when the carrier reports the change to the lender.
• Lowering the deductible after a claim, when the premium has just risen for the claim and the extra premium for the lower deductible compounds it.

A worked example

Suppose a driver in St. George pays $600 a year for collision at a $500 deductible, and the carrier quotes $460 for the same coverage at a $1,000 deductible. The saving is $140 a year and the extra deductible is $500, so the break-even is about three and a half claim-free years. She has $4,000 in an account she could draw on tomorrow and has filed one collision claim in the past eight years. She takes the $1,000 deductible. On the home side, her policy has a $1,500 all-perils deductible and a two percent wind and hail deductible on a $350,000 dwelling limit, which is $7,000 for a hail claim; she had assumed it was $1,500. Raising the all-perils deductible to $2,500 would save $60 a year, a break-even of nearly seventeen years, so she leaves it. The changes save $140 a year, and she knows for the first time what a hailstorm would actually cost her. All figures are illustrative.

How to use this

Send us the declarations pages and we return the premium at each available deductible, for each coverage, with the break-even worked out, and we flag any percentage deductibles and lender caps in plain figures. Where the current deductibles are already where the arithmetic and the household's reserve put them, that is the answer, and it costs nothing to find out.