When you retire, your income might shrink, and you may try to cut back on certain household expenses. That might make you want to scale back your homeowners insurance premiums. You might believe that one way to save is to raise your policy's deductibles. Is this a wise step to take?

Understanding A Deductible

A deductible is your responsibility for an insurance claim before your policy pays. You’ll pay the deductible, and your policy will cover the rest of the claim cost (so long as that total is within the policy’s limits).

Your home's structure and contents insurance, and sometimes other provisions, will likely contain deductibles. Deductibles vary from policy to policy, and you often can select values appropriate to you. You might find structure coverage deductibles ranging from $500 all the way to $10,000 and higher.

Deductibles At Work

Let’s say your insurance deductible is $500, and your home sustains $1,500 worth of damage from a severe storm. Your policy will pay for repairs after you pay your deductible towards these costs. You’ll pay the $500 and your policy will pay the remaining $1,000.

The formula is: Total Claim - Deductible = Insurance’s Payout. In your case, that is $1,500 - $500 = $1,000.

Does Raising Your Deductible Help Premiums?

By raising your deductible, your insurer will shoulder less of the cost of a claim if one arises. And, if you prove less of a cost to the insurer, you also equal less of a risk. Thus, they might be able to reduce your premium costs because of this lowered risk. Raising your premium from $1,500 to $9,500, for example, might save you over $1,600 per year on your premium. That’s good savings for most people.

Nevertheless, is this the right step to take?

Why Should I Not Increase the Deductible?

Think twice before increasing your home insurance deductible. It might lead to a smaller premium in the short-term. Yet, the long-term effects might prove financially challenging.

By raising your deductible, you’ll shoulder more of the cost of a claim. Looking at the example above, can you afford to pay a $9,500 deductible? Can you afford to pay the full cost of damage if the damage is below $9,500? Because the total falls below the deductible cost, your insurance won’t pay at all.

Will you lose a lot of money if you file a claim on a high deductible plan? That's a decision only you can make. A lower deductible (like $1,500) might increase your premium. However, you might only see a modest increase in your monthly insurance costs. Even so, you might still be able to save after a claim.