The Hidden Deductible You Need to Know About

If you look at your homeowners’ policy, you may see an additional deductible.

You probably didn’t notice when you signed up. It’s listed as a “2% wind deductible.” Your Insurance agent said that if you took the deductible, you could reduce your monthly rate by $40. That seemed worthwhile for such a small deductible.

Would it surprise you to know that that tiny deductible could cost you anywhere from $5,000 to $20,000 in additional money out of pocket in case of a disaster?

It surprised a lot of people after Hurricane Sandy, and we’d like to keep you from being caught unawares.

What’s a Wind Deductible?

Wind deductibles are confusing because they’re often presented in percentages, instead of a flat amount. Your deductible for your homeowners’ policy, for example, might be $1,000. That’s easy enough to understand – you pay the $1,000 deductible, and the insurance company pays for the rest.

The wind deductible, however, is presented as a 2% wind deductible, or a 5% wind deductible, and so on. The more at-risk your area is for hurricanes and tornadoes, the higher your wind deductible percentage is likely to be. Here’s the catch: that percentage indicates the percentage of the total value of your home, as stated in your policy.

For example, a 2% deductible on a $500,000 home is a $10,000 wind deductible.

Let’s say your $500,000 home was hit with a hurricane like Hurricane Sandy. The damage is pretty severe, amounting to $65,000. Your deductible is $1,000 and you have a 2% wind deductible.

You think that your insurance company will pay $64,000 – that’s $65,000 in damages minus your $1,000 deductible. But in fact, your insurance company is only going to pay $54,000: $65,000 in damages minus the wind deductible of $10,000.

Suddenly you’re paying $10,000 out of pocket to repair your home, instead of the $1,000 you had planned on being prepared to pay. That’s a pretty significant difference.

Why Does the Wind Deductible Exist?

The vast majority of claims for homeowners insurance are the result of wind or hail, according to the Insurance Information Institute, and the percentages are only going up as weather becomes more unpredictable. In 2010, 36% of homeowners’ claims were for damage from wind or hail; by 2011, that number had jumped to 46%.

To keep policies looking more appealing, insurance companies are sneaking in an extra deductible that only applies to these most likely claims. Since most policy buyers aren’t aware of the wind deductible and don’t know how to calculate its cost, it often slips by unnoticed.

1%, 2% – even 5% sounds like a pretty small wind deductible. It doesn’t seem like that can possibly be as much as the $1,000 or $5,000 deductible you already agreed to. And it’s just for wind – how much damage can wind do?

Quite a lot, it turns out. It can damage your home and your pocketbook pretty severely.

What Can You Do?

Wind deductibles are often offered to keep the policy’s monthly cost lower. If you have better coverage, you won’t pay a wind deductible in exchange for a slightly higher monthly bill. That’s well worth the additional cost, especially if you’re in an area with any kind of reasonable risk of wind damage over the period you’ll own your home.

Otherwise, we highly recommend setting aside the wind deductible just as you would set aside the deductible for your policy overall. Calculate the percentage of your home’s total costs and keep it ready for disaster. Without that money, you’re looking at a long period of being unable to make the necessary repairs, which could be miserable.

Talk to your insurance agent. If possible, see if you can eliminate the wind deductible entirely. If that’s not possible, negotiate for a lower percentage, and make sure you put those savings aside in case of an emergency.

Wind doesn’t seem like it can do much damage – until Hurricane Sandy comes to town.