Homeowners Now Use This Strategy To Save Money on Home Insurance. Is It a Good Idea?

According to a new Market Watch article, homeowners who are struggling with the cost of higher homeowner insurance premiums are making the move to policies with higher deductibles to help lower their costs. While this strategy may work for some, it is not the best idea for everyone. 

Data from the Intercontinental Exchange (ICE) showed that homeowners who took out a mortgage last year opted for deductibles that were 19% higher than those of the average mortgage holder. This resulted in a premium that was 12% lower than the average premium. 

Homeowners are also shopping their coverage more frequently with 11.4% of homeowners with a mortgage switching insurers in 2024 which is up roughly 2 points from the year before. 

While moving to a higher deductible or switching insurers can lead to a lower premium, is it the right move for all homeowners?

Why has homeowners-insurance insurance gotten so expensive 

Many homeowners have seen massive premium increases in recent years. This is because natural disasters such as hurricanes and wildfires have become more frequent due to climate change.

Huge disasters result in thousands of claims for insurance companies and those losses and higher operating costs are passed onto to homeowner’s via higher premiums. 

According to Treasury Department data released in January, between 2018 and 2022, the cost of the average homeowners-insurance premium rose 8.7% faster than the rate of inflation. The pain was even worse for homeowners high risk areas, premiums rose 15% faster than inflation in these areas with the average premium hitting $2,321 over the four-year span. 

Premiums have continued to rise, the Intercontinental Exchange report found that across the country the average homeowners insurance premium hit a high of $2,290, which is a whopping 14% more than a year earlier, and the largest yearly increase on record since ICE began tracking the data in 2013.

Specific states and cities, where natural disasters are more likely to occur have seen major increases in the cost of coverage. Florida is a prime example. Homeowners in Miami are paying some of the highest premiums in the country with the average cost of coverage hitting $6,200 per year in 2024. New Orleans managed a second-place finish, paying $5,700 a year on average in insurance premiums.

Is switching insurers a good idea?

One of the best ways to lower your insurance costs is to shop your coverage. According to the ICE report, homeowners in Miami were most like to switch insurers in 2024. New Orleans and another Florida city, Orlando tied for second with 23% of homeowners shopping for a new insurance policy. 

While shopping for a new insurer paid off for many homeowners, not everyone was successful. The report found that switching insurers in Jacksonville Florida, Dallas and San Antonio, Texas; and Denver, Colo., shaved “at least 10%” on the average premium compared to homeowners who stuck with their current insurer.

However, homeowners who put a new policy in place in Miami actually paid 2% more for their new coverage. The situation in California was even worse with homeowners in San Diego, San Jose and Los Angeles paying at least 15% more on average when switching insurance companies.

In California and Florida some of the increase can be explained by the fact that many national insurers have pulled out of areas in these states, forcing homeowners to find coverage with the state insurer of last resort.

Moving to a higher deductible

The other strategy some homeowners are choosing is to take on a higher deductible to reduce their insurance costs. 

The ICE report found that in 2024, on average homeowners raised their deductible by 19% which translates into $390. Raising your deductible will almost always result in a lower premium. 

A home-insurance deductible simply refers to the amount of money that the homeowner must pay out of pocket before the insurance company steps up and pays the balance. The deductible applies to each claim you make, and the deductible amount can vary depending on the type of damage. 

Homeowners insurance can come with two different types of deductibles, standard and percentage. A standard deductible amount is a fixed amount, usually between $500 and $2,000.

A percentage deductible is different and can result in much larger out of pocket cost. In most states, percentage deductibles apply to wind, hail, or hurricane-related claims. A percentage deductible means that your out-of-pocket costs are a percentage of the home’s total insured value.  As an example, if your home is insured for $400,000 and the deductible is 3%, you would pay $12,000 out of pocket before your insurer picks up the balance.  

According to data from the ICE report, many homeowners switched to a percentage deductible policy in 2024. The chart from the Market Watch article clearly shows a huge change in percentage deductible policies. 

While a percentage deductible policy will absolutely lower your premium it is not always the best strategy. 

If you can easily afford to cover a percentage deductible, switching often makes sense but if you would struggle to cover your new deductible, a percentage deductible policy may not be the best choice. 

Your out-of-pocket costs with a percentage deductible is often in the thousands or tens of thousands of dollars, making it difficult for many homeowners to cover. According to the Federal Reserve’s most recent Survey of Consumer Finances, the median savings-account balance held by people in the U.S. was $8,000 in 2022 which is less than many percentage deductibles. 

When it comes to percentage deducible policies, it is always a good idea to choose a deductible amount you can afford and to keep that deductible amount in a savings account in the event you have to make a claim on the policy.