Deductibles Explained

When paying a claim, your insurance policy will pay the covered loss minus your deductible which you chose and has been written into the policy. You are responsible for the deductible.

An insurance deductible is the fixed amount, or sometimes a percentage of an insurance claim which is what the insured person has to pay before the insurance kicks in.

So In other words, if you have a policy with a $1,000 deductible, and you file a claim for $30,000, you have to pay $1,000 before the insurance company issues a check for the other $29,000.

Deductibles were created, in large part, in order to keep people from filing large numbers of small claims, which cause more work on the insurance and claims end than revenue generated, while covering large claims, which is why most people have insurance to begin with.

You are generally going to be able to choose what deductible amount you are comfortable with above a standard deductible which the insurance company has set. This gives you some control over the cost of your policy. Generally speaking, the higher the deductible, the lower the premium is on the policy and vice versa.

In order to find which deductible is going to work for you, you will have to weigh the risk and projected impact of a loss against the cost of the premium in your cash flow analysis.

It is important to note that it might sound sensible, after analyzing your monthly cash flow, to choose the highest deductible in order to get the lowest premium. That may be dangerous.

If in order to scrape the amount of the deductible in the event of a loss, you would cripple your business, then you should probably choose a lower deductible and free up enough money monthly in order to pay the higher premium.

Another important piece of information which should go into the decision is how you, the insured, will recoup your loss. If your insurance policy is written to give you “replacement cost,” that will cover replacement or repair of the insured property at what it worth at the time of the repair or replacement. If it is a “cash value” coverage, it will replace covered property at what that property cost you, less depreciation.

Replacement cost will, of course, have a higher premium than cash value will have.

As always, we advise people to work with their licensed insurance professional in order to make the wisest decision and get the best coverage for their business without sacrificing value.

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