The headline above always gets investor landlords interested. As I have said many times when speaking to AZREIA members or other investor groups, the answer is very simple: Raise Your Insurance Deductible!
Financial and tax planners will frequently recommend higher insurance deductibles as a way to cut investor overhead, but the suggestion is not as simplistic as it might seem. Most people understand that the higher the deductible, the lower the insurance cost. But there are other things to consider.
Your CPA or tax-preparer will confirm for you that certain “uninsured losses” can be taken as a deduction on your Federal tax return. When you have an insurance claim, the policy deductible is one of those “uninsured losses.” Every investor needs to know that there is a big difference between “uninsured losses” on the insurance policy for their personal residence or vacation home, versus “uninsured losses” on an investment rental property. For a property that is not an income producer, such as your personal residence or a vacation home, “uninsured losses” (the policy deductible) must exceed 10% of your Adjusted Gross Income (AGI) in order to qualify as a Federal tax deduction. Even with a lower adjusted gross income of $50,000 (for example), that means that only your deductible costs above $50,000 could be taken as a tax deduction. In truth, very few people will qualify for this deduction.
For investor owned rental property, the rules are very different. There is no 10% rule. Your tax advisor will confirm for you that all of your deductible expenses can be deducted on your Federal return for income property. This means that if you have an insurance claim, and you have a $2,000 deductible, and you are in the 35% tax bracket, your true cost for that $2,000 deductible is only $1,300.
But wait, there’s more! There are even more reasons why knowledgeable investors are trending toward higher deductibles. One reason is that higher deductibles have been shown to reduce the tendency to file smaller, ‘nuisance claims’ that are actually best handled by the owner. The insurance industry says, “Let the owner take care of the ‘aggravation’ and let your insurance policy take care of the ‘devastation.’” In the long run, this process can help the investor keep ‘claims free’ discounts and steer clear of negative underwriting actions such as a required high deductible or even policy non-renewal in cases involving excessive claims.
The average Arizona rental property deductible is estimated at about $2,500, and most owners have about one insurance claim every 16 years. There is a definite trend toward higher deductibles. There is also a trend toward deductibles that are expressed as a percentage of the amount of insurance on the building. For example, if a house is insured for $275,000 and has a 1% deductible, the deductible is $2,750. Since most insurance companies have some type of inflation increase built into their policies, the percent deductible automatically keeps pace with inflation.
* * * * * * CLARK SANCHEZ has been an Arizona insurance agent for over 38 years and has been a Vendor-Affiliate with AZREIA for over 13 years. You can contact Clark if you have any insurance related questions at: (602) 803-2179 or firstname.lastname@example.org