I came across an interesting “Homeowners Deductible Calculator” on the Farmers Web site.
http://www.farmers.com/home_deductible_calculator.html
There is a field for you to estimate how many claims you might expect to have. The default is 1 – 2, but you can change this to “0”, or to “3 or more”. They don’t specify a period of time, but I might think about it in terms of how many claims would you expect to have over a 3 – 5 year period.
There is a field for you to fill in how much cash you have available for emergencies. The default is $5000, which feels like a lot to me. I’m not sure how many people have easy access to $5000 cash or credit in the event of an emergency, but you can fill out whatever number you want there.
The next field is for your monthly disposable income. By disposable income they are referring to how much money you have left over at the end of the month after you pay all of your bills.
Next you select how you spend that extra cash you have at the end of each month – your disposable income. Your options are “pay off debt”, “save” or “spend”.
Finally, it asks you to enter your home value.
Once you enter these variables it tells you what may be the best Homeowners Insurance deductible range for you. I don’t think it is intended to be exact, but after playing with it my instinct told me that it felt about right.
The only surprise to me was that if you kept all the variables constant and only moved the number of claims, as you went to a higher number of claims, the calculator suggested that a higher deductible range may be your best option.
This was initially counter-intuitive to me, but after thinking about it for a while, I think they might be suggesting that if you have a lot of claims you might want to raise your deductible so you actually submit fewer claims to your carrier. While that might make sense from the perspective of keeping your premiums low, it wouldn’t help you in the least from a financial perspective as all those unreported losses would have to be repaired out of your pocket.
In states like Texas, my gut tells me that many Texas homeowners policies specify deductibles much higher than the amounts suggested by the deductible calculator.
I would love to hear your feedback after you “play” with the calculator and then compare that to the deductible specified on your homeowners policy.
