If you read personal finance blogs and magazines like I do, you’ll constantly find articles on “ways to save money on insurance”. Go ahead and GOOGLE it and check out some of the posts. While the tips vary from one article to the next, the one tip that is consistently on every financial expert’s “Top 5” list is to increase your deductible. The reason this tip is on every expert’s list is because it’s the best advice you could receive. Here is the mathematical proof behind the logic:
I looked at a random home insurance customer who is paying $859/year for insurance with a $500 deductible. As you know, this means he will pay the first $500 of damage if he has a claim. This customer, if he increased to $1000 deductible would save $80/year. I know…doesn’t sound earth-shattering…but if you consider the average homeowner has a claim about once every 14 years, he’ll save $1120 over this time. If he is average and has one claim, it will cost him $500 more than if he had $500 deductible. Net savings: $620. If he is worse than average and makes two claims, he still nets a savings of $120. It becomes even more of a no-brainer when you factor in the whole time-value of money (i.e. a dollar saved today is worth more than a dollar paid out in the future).
I used a similar example for collision coverage on auto insurance. My customer was paying $1165/year for two cars with $500 deductible. He increased to $1000 and saved $168/year. For every 3 years he goes without a claim, he makes a net profit. If he is an average driver, he’ll have a collision once every 5-7 years.
HOWEVER: Please don’t live in fear of a high deductible. If you are a safe driver, ask yourself the question “How high of a deductible would I be able to pay without it being a major financial hit?” If you’re truly living paycheck to paycheck, then the $1000 deductible may not be a fit for you. So my advice would be to try your best to establish an emergency fund. Once it reaches $1000, keep that money safe and then increase your dedcutibles. If you have a claim, the money is there.
For a personal, no obligation review of your coverage, please email me or call 571-969-3743.