Your insurance deductible is the portion of any covered repairs that you agree to pay. If your deductible is $500 and a hurricane rips a hole in your roof that costs $5,000 to repair, you’d pay $500 and insurance would pay $4,500. Most home insurance deductibles are somewhere between $500 and $2,500, but can often be set much higher.
You may already know that raising your deductible is a quick way to lower your premium. Raising it from just $500 to $1,000 can drop your rate by as much as 25%. Raising it even more than that could, likewise, lower your premium even more. But, how high is too high? And, how low is too low?
The 1% deductible rule is meant to be a shorthand for finding the right balance. It may not make sense for every homeowner, but it’s still a good starting point to find an amount that you’re comfortable paying if you have to, yet is still high enough to keep your premiums under control.
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What is the 1% deductible rule in home insurance?
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On a standard home insurance policy, you’ll usually see a couple of different deductibles. For example, you might have one that applies only to hurricane insurance claims and another deductible that applies to all other claims. Sometimes, these are already listed as a percentage (usually 1% or 2%, but sometimes as high as 10%).
But, even when they’re listed as a flat cash amount, some experts recommend setting your deductible to 1% of the construction cost of your home. That’s not the market value of your home, but the actual cost to rebuild it from the ground up.
If you pull up your policy paperwork, the insurer will typically list its estimate of that cost as “replacement value” or “replacement cost.”
If the replacement cost of your home is, say, $300,000, following the 1% deductible rule would mean setting your deductible at $3,000. If yours is currently set at, say, $1,000, following this rule could triple your deductible which could potentially bring down your premium quite a bit.
To see just how much of a difference it would make, use our comparison tool, powered by Bankrate, to see how much a policy would cost if you set the deductible to 1% of the replacement cost of your home:
Is the 1% deductible rule a practical option for you?
The purpose of this rule is to give homeowners an easy way to strike the balance between saving on premiums while still having enough coverage to protect them from a major loss. But, does the rule still do that at a time when construction costs are soaring?
It depends on your budget. A higher deductible could dramatically lower your premium. But, the tradeoff is only worth it if you could comfortably cover the amount when disaster strikes. That means you probably don’t want to set it higher than your emergency fund and it should be an amount that you could replenish within a few months.
Depending on where you live, that comfortable amount might be less than 1% of the replacement cost of your home. But if you can afford to raise your deductible even a little bit closer to that 1% target, you still may see some savings.
Not using your insurance is another benefit of the 1% rule
One of the most annoying things about insurance is that it feels like a service you have to pay for, but you’ll get punished for actually using it. That’s because in many states, filing a claim can cause your home insurance costs to surge as you now have a claim history.
Your goal as a homeowner is to avoid filing claims for smaller issues where the payout wouldn’t be worth the price hike. Bumping that deductible to 1% of your home’s replacement cost can result in immediate savings now and add further incentive to avoid filing claims for those smaller repairs.
While it’s not fun to pay for something you have to avoid using, following this rule at least allows you to pay a little less while still having that peace of mind that you’re covered for those more expensive damages.
