What About Percentage-Based Deductibles

In August, 1992, Hurricane Andrew tore through Florida and much of the East Coast, destroying billions of dollars of property. Major insurance companies, such as State Farm and Allstate, as the dominant homeowner insurance providers, found themselves footing incredibly hefty bills.

As a response, these insurers and an increasing number of other insurance providers across the country (and especially in coastal regions at greater risk of hurricanes and severe weather) have implemented percentage-based deductibles. In general, your deductible is a fixed, flat sum of money that you are required to pay on your own before you insurance policy kicks in.

The percentage-based deductible establishes the amount of the deductible as a percentage of your house's insured value. This can mean covering much more of the expenses should disaster strike. If you find yourself paying for 5-15% of your home's worth following a hurricane or hailstorm, you may find yourself in dire financial circumstances!

While the percentage-based deductible is a way for insurance companies to protect themselves from being overwhelmed by expensive claims after a serious natural disaster, it is the policy holder who may end up footing the bulk of these bills. For this reason, percentage-based deductibles have been far from popular with the insured.

Many insurance companies have now implemented percentage-based deductibles into their homeowners plans. Generally speaking, these are most common in geographical reasons that are at risk for hurricanes, hailstorms, and tropical storms, but it is no longer exclusively the domain of coastal regions. In any area determined a catastrophe area, percentage-based deductibles provide a safety-net for insurance companies.

Still, there are benefits to percentage-based deductibles that are not merely exclusive to insurance companies. Percentage-based deductibles allow insurance companies to write cheaper premiums on their policies in areas that are otherwise considered high-risk regions. Many companies even offer credit on your policy for switching to a percentage deduction. If, however, a lower premium is not your chief concern, you are often allowed to purchase a flat deductible rate by having a higher premium.

Percentage-based deductibles are a heated issue. Insurance companies seeking to protect themselves from catastrophes see it as a solution, and one that in certain high-risk regions they require of their policy holders. Some people believe percentage deductibles are just another way for insurance companies to make more money when rate hikes have been denied by the state.

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©2004 The Lawrence Marketing Group

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