As An Investor, Which Deductible Should I Choose?

I almost exclusively provide insurance for real estate investors. One of the most common questions I receive is about the deductible. Investors, both new and seasoned, often wonder how small or large of a deductible they should carry.

When all the facts and opinions settle, the truth is, this is completely up to you. Only you can determine the best answer for your business model and risk tolerance. When asked this question, I generally give this advice: a minimum of $2,500 and a maximum of $5,000.

I’ve arrived at this advice because of three reasons: price, filing claims, and experience. I’ll explain. But first, a note about personal responsibility.

Personal Responsibility

As a real estate investor and entrepreneur, I read entirely too many books on self-improvement. Since you’re reading this, you probably do as well. Jocko Willink wrote an awesome book, Extreme Ownership, that highlights the importance of personal responsibility.

On an insurance policy, I like to compare the deductible to your personal responsibility. Insurance companies reward higher deductibles, because it shows that you will take personal responsibility for the smaller items. In the same way, the fewer claims you file, the more personal responsibility you show the insurance companies, the more favorable rates you receive (they collect centuries of data on everyone...all the time).

Insurance companies see policies with low deductibles as a higher risk. If a $500 deductible is present, a surcharge is put in place because let’s be honest, there isn’t much that can happen to a home that is less than $500. In turn, the insurance company can potentially be held liable for virtually anything that can happen to the property. This isn’t good for you because of both the surcharge, and the likelihood your policy will be cancelled if you file too many claims.

Now, back to why you should go with a higher deductible.

Price

Price alone should never be a driving factor in insurance. If you go after the cheapest policy, you’ll probably walk away from claims empty-handed. Bare minimum coverage is very specific about what it covers. I’ll spare you that tangent. But, as it pertains to a deductible, there is generally a surcharge for smaller deductibles. If you want to carry a $500 deductible, your premium will likely increase by close to $500 annually. Would you rather keep $500 in your pocket, or give it to the insurance company?

Filing Claims

Filing claims is the second determining factor in choosing a higher deductible. As mentioned, insurance companies love to see you show personal responsibility. In all of the data they collect, the most important is your claims history. The insurance industry refers to these as your “loss runs.”

The upside of insurance is that you protect your portfolio by shielding a large amount of exposure on liability and catastrophic property damage. The downside of insurance is that, if you use it too often, insurance companies will often non-renew or cancel your policy. Each company is different on their threshold, I’ve heard anywhere from two claims in one year to five over three years. The general rule of thumb is that if you don’t have to file a claim, don’t.

Once your policy is non-renewed or cancelled due to claims, it becomes incredibly hard to place your insurance elsewhere. Remember, insurance companies share resources and databases. You can’t hide from your claims no matter how big or how small.

Before I was in the insurance industry, I had no idea. I used to operate off what I referred to as the “disposable car theory.” I never spent more than $1,500 on a vehicle. Once is broke down, I had it towed somewhere and fixed. I used my auto insurance for the rental car and towing each time. Yikes! I didn’t realize it, because I didn’t commonly discuss my insurance rates with my peers...but I really racked up a high auto premium! Not to mention, once I wanted to write my own insurance policy, I really had to convince companies to give me a shot. No one wanted to take me on due to how many claims I had filed.

Personal Experience

The last reason I’ll give you in choosing a higher deductible is my personal experience. As I’ve spent my days quoting insurance policies for real estate investors, I’ve noticed trends.

It seems the price decreases most favorably at the $2,500 mark. Once you pass the $2,500 mark, the additional decrease in price doesn’t justify the additional money out of pocket. For instance, moving to a $5,000 deductible may not decrease the price but an additional $200 to $300 per year.

So, how many years would you need to recoup your money? Is it worth coming out of pocket the additional $2,500 in the event of a claim? That is up to you. I personally don’t carry a $5,000 deductible yet, primarily because my pockets aren’t that deep yet. But, in due time, I will most likely crank it up to $5,000.

This shift comes because, at the end of the day, the insurance company still holds the largest amount of risk. They are insuring the entire building and liability limits. So, if the building is insured at $100,000 with $1,000,000/2,000,000 liability limits. The insurance company rewards your willingness to take on the personal responsibility for the smaller stuff. However, in the event of a total loss or large liability claim, the difference between the $5,000 and $10,000 deductible doesn’t matter too much to them as they are stroking out that $95,000 or $995,000 check.

Have any questions or just want to talk real estate investing? Drop me a line here on BiggerPockets!