About Catastrophic High-Deductible Homeowner's Insurance

by Lee Nichols

Typically, home insurance policies do not pay for losses incurred because of hurricanes, earthquakes, wildfires or other catastrophic events. Homeowners must purchase supplemental policies to ensure full coverage of their home and belongings. These supplemental policies typically have lower premiums than traditional policies, but the lower premiums are offset by high deductibles. The deductible is the portion of your loss that is your responsibility.


Typically, the higher the deductible, the lower your premiums. However, you must weigh your ability to pay the deductible against the benefits of having a lower premium. Many insurance companies base your deductible on a percentage of the insured value of your home. For example, if your home is insured for $200,000, your deductible could be as much as 5.0 percent or $10,000, according to Kiplinger.


Premiums for catastrophic coverage varies depending on the location of your home and the amount of risk the insurance company is assuming. For example, earthquake policies are more expensive for homeowners living near fault lines, while hurricane policy premiums become less expensive for homes further away from the coast. In 2011, insurance companies paid $35.9 billion for catastrophic losses, up 51 percent from an average of $23.8 billion a year for the 10 previous years, according to the Insurance Information Institute. Because of this, analysts are speculating that companies will raise their premium rates and drop some policies to compensate for losses.

Protecting Your Finances

In South Carolina, residents may set up a catastrophe savings account that allows save money to pay a catastrophic policy's deductible. The state allows account holders to withdraw funds from the account tax free as long as the expenses are associated with a governor-declared emergency. Call your state's insurance commissioner to determine if a similar program is available where you live. If it is not, you may open a regular savings account to save for your deductible. However, you will have to pay taxes on any interest paid on the account.


If you have not saved enough to cover your deductible, there are other ways to pay it. You may withdraw the money from your retirement account or, if you cannot make an early withdrawal, take a loan from the account. The downside to these methods is that you may face substantial penalties and have to pay taxes on the amount you receive. If the catastrophe is due to a federally declared disaster, you may apply for a loan from the SBA or request help from FEMA. In order to qualify for an SBA loan, you must first request help from FEMA. SBA recommends filing for a low-interest disaster loan as soon as possible after a disaster to lessen your wait time for the funds.

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